A    RATIONAL 
BANKING    SYSTEM 


A  COMPREHENSIVE  STUDY  OF 
THE  ADVANTAGES  OF  THE 
BRANCH  BANK  SYSTEM 


BY 
H.  M.  P.  ECKARDT 

AUTHOR  OF 
MANUAL  OF  CANADIAN  BANKING1 


HARPER  6-  BROTHERS   PUBLISHERS 

NEW    YORK    AND    LONDON 

M  C  M  X  I 


COPYRIGHT.    1911,    BY   HARPER  A    BROTHERS 

PRINTED  IN  THE   UNITED  STATES  OF  AMERICA 

PUBLISHED    MARCH.    1911 


CONTENTS 

CHAP.  PAGE 

INTRODUCTION i 

I.  DEFALCATIONS  AND  FRAUDS 7 

II.  THE  COST  OP  SINGLE-OFFICE  BANKS 21 

III.  THE  PANICS 42 

IV.  THE  CLERKS  AND  OFFICERS 66 

V.  A  HYPOTHETICAL  BRANCH  BANK 81 

VI.  A  HYPOTHETICAL  BRANCH  BANK  (Concluded)   .     .  99 

VII.  MOVEMENT  OF  FUNDS  TO  AND  FROM  NEW  YORK  .     .  120 

VIII.  ANOTHER  HYPOTHETICAL  BRANCH  BANK      .     .     .  133 

IX.  WALL  STREET  DOMINATION 153 

X.  THE  CURRENCY  QUESTION 169 

XL         How  THE  CHANGE  MIGHT  BE  EFFECTED      ...  191 

XII.  INTERNAL  AND  EXTERNAL  EXAMINATION.     .     .     .  212 

XIII.  A  FIXED  LEGAL  RESERVE 231 

XIV.  THE  SAVINGS  BANK  BUSINESS 246 

XV.  FOREIGN  TRADE  AND  INTERNATIONAL  STANDING  .  262 

XVI.  THE  TREASURY'S  BANKING  BUSINESS       ....  278 

XVII.  BRANCH  BANKS  AND  BUSINESS  MORALITY    .     .     .  294 

XVIII.  CONCLUSION 304 

INDEX .     .     •  3J7 


250241 


A   RATIONAL   BANKING    SYSTEM 


A   RATIONAL 
BANKING    SYSTEM 

INTRODUCTION 

EFFECTS  OF  RECENT  PANICS 

ON  two  occasions  in  the  past  twenty  years  the  problem 
popularly  known  as  the  banking  question  has  been 
forcefully  pressed  upon  the  attention  of  the  American  peo- 
ple. After  the  panic  of  1893,  and  again  after  the  panic  of 
1907,  public-spirited  men  in  the  different  parts  of  the  United 
States  gave  themselves  earnestly  to  the  task  of  devising 
methods  by  which  bank  creditors  might  be  made  more  se- 
cure and  banking  panics  prevented.  The  people,  in  very 
considerable  numbers,  were  hit  by  the  financial  disorders  of 
those  two  years.  Some  were  depositors  who  suffered 
through  the  stoppage  of  the  banks  in  which  their  funds 
were  placed;  some  were  inconvenienced  and  injured 
through  the  general  suspension  of  cash  payments;  some 
were  borrowers  and  experienced  heavy  loss  through  the 
action  of  panic-stricken  bankers  in  exacting  payment  of 
all  advances  as  they  came  due;  some  were  crippled  and 
others  ruined  by  the  great  depreciation  in  securities  that 
occurred  on  both  occasions.  Besides  those  who  suffered 
material  loss  there  were  many  in  whose  eyes  the  frequent 
breakdown  of  the  banking  system  constituted  a  national 
humiliation.  Under  these  circumstances  it  was  but 
natural  that  the  discussion  of  reforms  should  centre 


,    ,    A    RATIONAL  -BANKING    SYSTEM 

chiefly  around  the  problems  of  how  to  make  depositors 
more  secure  and  less  liable  to  panic,  and  how  to  introduce 
into  the  banking  system  some  new  elements  calculated 
to  enable  the  banks  to  stand  up  and  pay  cash,  as  do  the 
banks  in  other  great  countries,  through  crises  and  emer- 
gencies. 

THE  BANKING  SYSTEM'S  ACKNOWLEDGED  DEFECTS 

Then  in  certain  years  between  the  panics  the  inelasticity 
of  the  currency  has  inflicted  considerable  loss  upon  the 
commercial  and  financial  interests  of  the  country,  through 
the  stringency  and  trouble  which  it  caused  during  the 
fall  or  crop-moving  season.  So  there  has  also  been  much 
discussion  as  to  how  the  currency  should  be  improved  or 
changed. 

These  comprise  the  defects  of  the  banking  system  of  the 
United  States  which  are  recognized  on  all  sides.  It  is, 
however,  commonly  believed  that  the  defects  may  be  re- 
moved or  covered  without  making  radical  alterations  in 
the  character  of  the  banks.  Nearly  all  of  the  suggested 
reforms  proceed  upon  the  assumption  that  the  system  of 
local  single-office  binks  is  well  adapted  to  the  needs  of 
the  country  and  that  it  should  be  tenaciously  adhered  to. 
In  the  banks  and  outside  of  them  exists  a  strong  sentiment 
in  favor  of  the  present  system  and  against  branch  banks. 

WHY  BRANCH  BANKS  ARE  NOT  CONSIDERED 

Thus  Senator  Aldrich  in  his  address  at  Chicago  on  the 
banking  question,  in  November,  1909,  mentioned  the 
branch  idea  as  something  to  be  eliminated  from  the  dis- 
cussion of  practicable  remedies.  His  words,  as  quoted  in 
the  New  York  Journal  of  Commerce,  are:  "Whatever  may 
be  the  advantages  of  a  system  of  branch  banking  in  other 
countries,  I  do  not  think  it  is  possible  to  adapt  it  to  ex- 
isting conditions  in  the  United  States.  The  twenty-five 


INTRODUCTION 

thousand  banks  now  in  existence  are  largely  independent 
institutions  whose  managers  are  familiar  with  the  wants 
and  requirements  of  the  communities  in  which  they  are 
located.  The  great  mass  of  the  people  who  use  banking 
facilities,  either  as  depositors  or  borrowers,  would  be  un- 
willing to  give  up  the  advantage  of  that  intimate  personal 
knowledge  of  the  local  bank  officers  and  managers  which 
they  believe  to  be  essential  to  their  interests.  It  would  be 
difficult,  for  instance,  to  convince  borrowers  and  depositors 
in  a  small  town  in  Illinois  that  a  man  who  had  always 
lived  in  the  same  community  would  not  have  a  clearer 
and  more  sympathetic  appreciation  of  their  needs  and 
credit  than  an  agent  sent  from  one  of  the  large  banks  in 
New  York  whose  principal  ambition  might  be  to  earn  the 
largest  possible  amount  of  money  for  his  institution  rather 
than  to  develop  the  prosperity  of  the  community  to  which 
he  was  assigned.  I  realize,  of  course,  that  in  the  United 
States,  as  in  Germany,  there  is  a  tendency  on  the  part 
of  the  large  banks  in  the  reserve  and  central  reserve  cities 
to  establish  a  rather  close  community  of  interest  with 
correspondents  whose  business  and  organization  is  more 
or  less  affiliated  with  the  central  institution.  This  ar- 
rangement has  many  of  the  advantages  of  branch  banks 
without  being  subject  to  the  positive  objections  which 
exist  with  reference  to  the  latter  plan." 

While  this  sentiment,  to  which  Senator  Aldrich  refers, 
retains  its  present  force  it  is  obviously  impossible  that 
there  should  be  any  general  movement  toward  the  institu- 
tion of  branch  banking.  Even  if  the  legislatures  were  to 
authorize  branch  banks  they  would  not  make  substantial 
headway  while  neither  the  bankers  nor  the  people  wanted 
them. 

THE  CASE  FOR  BRANCH  BANKS 

Briefly  stated,  the  object  of  this  book  is  to  gain  friend- 
ship for  the  branch-bank  idea.  With  regard  to  the  atti- 
tude of  the  banking  interests  it  is  possible  to  see  some 

3 


A    RATIONAL    BANKING    SYSTEM 

progress  toward  a  favorable  opinion.  I  can  remember 
how  that  some  fifteen  years  ago  scarcely  a  voice  among 
the  bankers  was  heard  in  favor  of  the  branch  system  as  a 
solution  of  the  monetary  troubles  of  the  United  States. 
Now  there  is  a  considerable  number  of  bankers  in  the 
large  cities  who  favor  the  idea  and  who  would  actively 
institute  branches  throughout  the  country  if  they  were 
permitted  to  do  so.  But  the  so-called  country  bankers 
are  bitterly  opposed.  I  am  convinced  that  if  they  had  a 
more  accurate  notion  as  to  how  they,  their  stockholders, 
their  employees,  their  customers,  and  their  country  would 
benefit  from  the  conversion  of  their  single  offices  into 
branch  banks  this  hostility  would  tend  to  disappear.  If 
it  were  materially  softened,  and  if  in  time  the  sentiment 
of  the  general  public  were  to  become  more  favorable,  the 
way  would  be  opened  for  a  satisfactory  settlement  of  the 
difficult  financial  problems  now  before  the  nation.  I 
propose,  therefore,  to  present  a  comprehensive  statement 
of  the  case  for  branch  banks,  in  the  course  of  which  I 
shall  try  to  show  the  advantages  that  would  accrue  to 
various  classes  of  the  people  and  to  the  country  as  a  whole 
upon  their  adoption.  Also  I  shall  try  to  answer  the  va- 
rious objections  commonly  urged  in  the  United  States 
against  the  branch  system.  I  think  that  many  of  my 
readers  will  be  surprised  at  the  number  of  counts  which 
can  properly  be  included  in  the  indictment  of  the  single- 
office  type  of  banks,  and  at  the  variety  and  number  of  ad- 
vantages to  be  expected  to  accompany  the  institution  of 
the  right  type  of  branch  bank. 

THE  AUTHOR'S  QUALIFICATIONS 

For  the  enlightenment  of  those  who  wish  to  know  my 
qualifications  for  undertaking  this  work  I  might  say  that 
I  entered  the  service  of  one  of  the  large  Canadian  branch 
banks  as  junior  at  the  age  of  seventeen,  and  served  nine- 
teen years.  My  service  covered  the  various  posts  from 

4 


INTRODUCTION 

junior  up  to  branch  manager,  at  a  country  branch  in 
Ontario,  at  a  Western  financial  centre,  and  at  a  Manitoba 
country  town;  it  was  rounded  out  by  a  five-year  period 
at  the  head  office  in  Montreal.  In  the  five  years  that  have 
elapsed  since  the  completion  of  my  banking  service  I  have 
lived  for  the  greater  part  of  the  time  in  New  York  State 
and  have  devoted  myself  mainly  to  the  study  of  banking 
and  financial  matters  and  to  financial  writing.  My  study 
of  United  States  banking  conditions  has  continued  for 
more  than  fifteen  years. 

How  THE  ARGUMENT  WILL  BE  PRESENTED 

I  have  concluded  that  in  dealing  with  the  subject  the 
first  importance  should  not  be  given  to  any  of  the  matters 
which  have  been  so  much  debated:  the  security  of  d 
positors,  the  prevention  of  panics,  and  the  provision  of 
elastic  currency.  Each  one  of  these  questions  is,  to  be 
sure,  of  great  importance;  but,  in  my  opinion,  all  of  them 
are  subordinate  to  the  main  question  as  to  how  the  banks 
under  the  present  system  fulfil,  day  by  day  and  week  by 
week,  the  obligations  and  duties  owed  by  them  to  the 
commerce  and  industry  of  the  country.  If  agriculture 
and  the  great  industries  and  trades  do  not  get  from  thzr 
banks,  regularly  every  day,  the  measure  of  support  and 
encouragement  to  which  they  are  properly  entitled  and 
which  is  regularly  accorded  to  them  in  other  countries, 
the  circumstance  constitutes  a  more  serious  indictment 
of  the  banking  system  than  to  charge  it  with  inflicting 
frequent  and  unnecessary  losses  on  bank  depositors  and 
of  going  down  in  disgrace  before  every  first-class  panic. 

I  have  considered  that  the  case  against  the  existing 
system  of  local  single-office  banks  can  be  presented  best 
through  giving  a  series  of  descriptions  illustrating  how 
the  various  interested  parties — bank  employees  and 
officers,  bank  customers,  borrowers  as  well  as  depositors, 
other  citizens  who  now  have  no  relations  with  banks,  the 

5 


A    RATIONAL    BANKING    SYSTEM 

corporations,  the  Government  of  the  United  States,  and 
the  country  itself — fare  under  the  present  system,  the 
benefits  they  enjoy  and  the  inconveniences  they  are  sub- 
jected to;  and,  along  with  this,  to  give  a  description  of 
what  their  condition  would  be  under  a  proper  system  of 
branch  banks. 

Several  important  banking  evils  will  be  pointed  out 
which  are  seen  in  no  other  great  country  than  the  United 
States;  and  it  will  be  shown  that  they  are  in  fact  natural 
results  of  the  local  system,  and  that  they  cannot  be  re- 
moved while  that  system  is  retained.  Also  in  dealing 
with  the  objections  to  branch  banks  I  shall  venture  some 
suggestions  as  to  how  certain  evils  regarded  as  being  asso- 
ciated with  them  might  be  eliminated  or  guarded  against. 
Finally,  the  question  as  to  how  branch  banks  might  be- 
come a  practical  possibility  will  be  dealt  with  and  I  shall 
suggest  how  they  might  develop  along  lines  which  would 
not  necessitate  a  great  destruction  of  banking  capital, 
and  which  would  enable  each  one  of  the  important  sections 
of  the  country  to  preserve  its  financial  independence;  how 
each  section  might,  as  a  matter  of  fact,  be  more  securely 
independent  of  the  dreaded  Wall  Street  money  power 
than  it  is  to-day  under  the  system  of  small  local  banks. 


I 

DEFALCATIONS  AND  FRAUDS 

THE  RECORD  OP  BANKING  FRAUDS 

NEARLY  everybody  understands  that  a  banking 
system  to  be  useful  must  possess  the  confidence  of 
the  people  it  essays  to  serve.  There  cannot  be  full  con- 
fidence unless  the  bankers  as  a  class  are  reputed  capable 
and  honorable  gentlemen.  If  thorough  confidence  does 
not  prevail  there  will  be,  among  the  possessors  of  cash, 
many  who  cannot  bring  themselves  to  trust  the  banks  at 
all,  and  many  of  those  who  do  deposit  money  in  banks 
will  be  suspicious  and  watchful,  prone  to  take  alarm  and 
to  rush  for  their  deposits  on  the  slightest  provocation. 
One  of  the  things  strongly  influencing  the  public  in  its  es- 
timation of  the  banks  and  of  the  bankers  is  the  record  of 
defalcations  and  frauds  by  bank  employees  and  officers.  / 
It  is  a  striking  feature  of  banking  in  the  United  States  / 
that  frauds  by  bankers  are  more  numerous  than  in  any 
other  highly  civilized  country.  If  the  daily  newspapers 
in  Great  Britain  be  closely  examined  from  year  end  to 
year  end  it  will  be  found  that  few  cases  of  dishonesty  of 
this  kind  appear  in  them.  For  weeks  at  a  time  the  record 
is  clear.  It  is  much  the  same  on  the  Continent  of  Europe ; 
cables  and  mail  despatches  from  Europe  have  very  little 
to  say  of  happenings  of  this  nature.  In  Canada  also  the 
record  is  satisfactory.  Week  after  week  goes  by  without 
a  single  instance  of  banking  fraud  appearing  in  the  papers. 
When  they  do  appear,  in  nearly  every  case  it  is  some 
teller  or  minor  clerk  who  has  stolen  a  few  hundreds  or  a 

7 


A    RATIONAL    BANKING    SYSTEM 

few  thousands  at  some  branch  office  of  more  or  less  im- 
portance; and  the  occurrence  hardly  operates  at  all  to 
lessen  the  public  respect  for  the  banks,  or  to  bring  banking 
into  disrepute.  Of  course  if  a  quick  succession  of  defalca- 
tions happened  at  various  branches  of  one  particular 
bank,  acute  observers  would  suspect  that  the  supervising 
and  inspecting  system  of  that  bank  was  lax,  and  perhaps 
it  would  also  be  suspected  that  it  was  below  the  general 
standard  in  regard  to  the  pay  and  treatment  of  its  men. 
But  when  they  are  of  small  importance  and  occur  sporadi- 
cally the  defalcations  do  not  affect  the  banking  reputation. 
There  is  never  any  thought,  in  the  public  mind,  when  some 
country  teller  of  a  leading  bank  absconds  with  $3,000  or 
$5,000,  that  its  depositors  or  creditors  are  in  anywise  con- 
cerned. Even  the  shareholders  of  the  defrauded  insti- 
tution take  no  notice  of  the  loss,  as  it  has  no  bearing,  of 
any  consequence,  upon  their  dividends. 

UNENVIABLE  PROMINENCE  OP  THE  UNITED  STATES 

But  in  the  United  States  every  week  has  its  crop  of 
bank  scandals.  There  may  be  two  or  there  may  be  half- 
a-dozen.  Sometimes  the  newspapers  for  days  at  a  time 
record  a  fresh  fraud  each  day.  One  time  it  is  a  savings- 
bank  in  New  England,  again  a  national  bank  in  the 
Eastern  States,  then  a  state  bank  in  the  Northwest,  then 
three  or  four  in  the  West  or  the  South,  then  back  again  to 
the  East,  every  section  of  the  country  taking  its  turn.  In 
a  number  of  cases  the  loss  is  heavy  enough  to  cause  the 
closing  of  the  defrauded  bank.  Often  enough  the  de- 
positors are  threatened  with  loss;  always  they  undergo 
some  anxiety  about  the  safety  of  their  funds;  and  in- 
variably the  stockholders  are  deeply  concerned. 

The  constant  recurrence  of  these  humiliating  episodes, 
and  the  faithful  blazoning  of  each  case  all  over  the  country 
by  the  press,  must  have  a  profound  effect  in  lessening  the 
general  estimation  of  banks  in  the  public  mind.  A  fairly 

8 


DEFALCATIONS    AND    FRAUDS 

large  number  of  people  must  have  the  idea  that  about 
half  of  the  bankers  are  rogues,  and  that  it  is  not  safe  to 
trust  money  with  any  of  them.  One  need  not  be  an  ex- 
pert to  see  that  the  prevalence  of  such  an  idea  must  keep 
many  millions  of  deposits  out  of  the  banks,  and  thus 
reduce  the  power  of  the  bankers  to  care  for  the  industrial 
and  mercantile  borrowers. 

SYSTEM  OP  ISOLATED  SMALL  BANKS  RESPONSIBLE 

Perhaps  some  persons  will  argue  that  there  are  more 
frauds  in  the  United  States  than  in  Canada  because  the 
Republic  is  so  much  more  populous  than  the  Dominion, 
and  because  its  business  is  so  much  more  important. 
But  the  difference  in  population  and  in  the  magnitude  of 
business  transacted  does  not  satisfactorily  account  for  the 
phenomenon.  If  the  United  States  be  compared  with 
Great  Britain  or  one  of  the  other  leading  European 
countries  the  disparity  in  regard  to  population  and  busi- 
ness is  not  quite  so  great;  yet  the  disparity  in  the  record 
of  banking  frauds  is  plainly  to  be  read.  Refuge  can 
hardly  be  taken  in  an  explanation  that  the  people  of  the 
United  States  are  more  dishonest  than  Canadians,  Eng- 
lishmen, or  Europeans.  Though  the  citizens  of  the  great 
American  Republic  are  sometimes  said  to  be  more  specu- 
latively  inclined,  more  disposed  to  take  large  chances, 
than  are  Englishmen  or  Canadians,  the  statement  is  open 
to  question ;  and  it  is  reasonable  enough  to  conclude  that 
the  classes  in  the  United  States  from  which  the  bankers 
are  drawn  are  fully  equal  in  point  of  morality  to  the 
classes  that  supply  the  material  for  the  banking  staffs  in 
the  other  Anglo-Saxon  countries.  Every  day  there  are 
forthcoming  evidences  that  Americans,  as  a  people,  hate 
fraud  and  dishonesty  as  earnestly  as,  and  perhaps  more 
earnestly  than,  do  the  people  of  other  countries.  They 
are  vigorously  striving  all  the  time  to  hunt  the  ugly 
things  down  and  to  destroy  them. 

9 


A    RATIONAL    BANKING    SYSTEM 

It  is  not  at  all  necessary  to  defame  the  character  of  the 
people  or  to  search  far  afield  for  the  explanation  of  the 
lower  tone  of  banking  in  the  Republic  and  of  the  rela- 
tively large  number  of  frauds.  It  can  easily  be  shown 
that  the  system  of  isolated  small  banks  lends  itself  pecul- 
iarly to  the  bringing  about  of  just  such  a  state  of  affairs. 
In  fact  it  could  hardly  be  otherwise  than  that  the  worst 
showing  in  this  regard  should  be  made  by  the  United 
States;  and,  so  long  as  the  present  banking  system  en- 
dures, in  spite  of  all  that  can  be  done  by  Federal  officials, 
state  officials,  and  banking  associations,  the  frauds  and 
defalcations  must  necessarily  be  numerous.  Why  it  is  so 
will  now  be  explained. 

THE  ONE-MAN  CONTROL 

An  examination  of  the  individual  cases  of  banking 
fraud  shows  that  in  a  great  many  of  them  it  is  the  president 
or  the  cashier  that  is  guilty  of  stealing.  There  are  over 
twenty-two  thousand  banks  of  all  kinds  in  the  whole 
country.  In  other  words,  there  are  over  twenty-two 
thousand  individuals  in  control  of  the  active  day-to-day 
operations  of  the  banking  institutions.  The  active  com- 
mand of  a  bank  may  rest  with  the  president,  with  the  vice- 
president,  or  with  the  cashier;  one  or  other  of  the  three 
conducts  the  operations  in  the  cases  of  all  of  these  inde- 
pendent banks.  This  ruling  officer  is  the  law  unto  the 
other  officers  and  clerks.  Though  he  is  responsible  to 
the  board  of  directors,  no  board  of  directors  could  follow 
him  from  transaction  to  transaction  throughout  the  day, 
and  from  day  to  day  throughout  the  year.  Even  a  board 
that  attempts  to  follow  its  executive  officer  closely  cannot 
do  more  than  hear  reports  from  him  frequently  and  ex- 
amine the  books  occasionally.  In  almost  any  bank  it  is 
usually  easy  to  conceal  crookedness  in  the  books  from  the 
directors,  because  they  lack  the  technical  knowledge 
necessary  to  detect  suspicious  circumstances  and  to  follow 

10 


DEFALCATIONS    AND    FRAUDS 

them  to  their  conclusions.  It  is  hardly  practicable  for  a 
bank  board  in  one  of  the  lesser  towns  or  villages  to  employ 
an  expert  for  the  purpose  of  checking  up  its  executive 
officer. 

So  in  practice  it  happens  that  a  great  many  of  the  banks 
are  ruled  by  one-man  power.  The  one  man  has  large 
opportunities  to  commit  fraud  if  he  is  inclined  that  way. 
In  every  country  and  under  every  banking  system  there 
will  be  a  certain  proportion  of  the  men  engaged  in  banking 
deficient  enough  in  integrity  and  in  wisdom  to  commit 
fraud  if  they  get  the  chance.  Under  the  United  States 
system  they  too  often  find  the  door  invitingly  open. 

Too  MUCH  OPPORTUNITY  TO  DEFRAUD 

A  high  officer  of  a  surety  company,  in  an  address  at  a 
state  bankers'  association  meeting  in  1909,  said:  "As  a 
matter  of  fact,  the  losses  under  bank  or  other  employees' 
bonds  sustained  by  surety  companies  are  not  so  much 
due,  primarily,  to  the  malicious  dishonesty  of  employees, 
as,  on  the  contrary,  to  the  absence  of  an  effective  system 
of  accounting  on  the  part  of  the  bank;  in  other  words, 
they  are  due  to  too  much  freedom  of  action  being  ac- 
corded the  employee  —  too  much  opportunity.  As  far 
as  possible  bankers  should  make  it  impossible  for  their 
employees  to  embezzle  money.  They  owe  it  to  their 
employees,  because  it  is  opportunity  that  makes  the 
thief." 

Now  there  is  not,  and  could  hardly  be,  any  uniformity 
of  system  or  practice  among  the  thousands  of  banks  in 
the  United  States.  Being  independent,  each  office  orders 
its  routine  and  affairs  to  suit  itself.  Generally  the  banks 
aim  to  have  as  little  red  tape  as  possible.  The  conse- 
quence is  that  in  a  large  proportion  of  the  offices,  perhaps 
in  a  majority  of  them,  business  is  conducted  on  loose 
lines,  with  scarcely  any  pretence  of  following  rules  and 
regulations. 

2  II 


A    RATIONAL    BANKING    SYSTEM 
THE  ILL-REGULATED  OFFICES 

I  concede  with  pleasure  that  there  are  many  banking 
offices  in  the  United  States  wherein  the  most  efficient 
safeguards  against  fraud  by  the  employees  are  continually 
in  force.  Especially  in  the  great  banking  offices  of  the 
larger  cities  is  the  routine  ordered  so  as  to  make  de- 
falcation difficult  and  immediately  dangerous.  Also  many 
of  the  banks  in  the  smaller  places  conduct  their  office 
work  strictly  under  proper  rules  and  regulations.  But 
the  point  is  that  the  system  ensures  that  there  will  be 
all  the  time  hundreds,  if  not  thousands,  of  banking  offices 
in  which  no  proper  safeguards  are  provided.  In  any 
part  of  the  country  one  may  without  difficulty  find  offices 
in  which  there  is  little  or  no  system  about  the  work.  The 
tellers  are  not  isolated;  other  clerks  have  access  to  the 
cash  and  pay  checks  and  take  deposits;  the  tellers  also 
are  permitted  to  enter  deposits  in  customers'  pass-books. 
The  one-man-ruler  is  a  veritable  czar;  the  clerks  under 
him  feel  that  they  are  as  much  his  servants  as  servants 
of  the  bank.  When  he  does  questionable  things  there  is 
no  one  to  stand  up  against  him;  no  one  willing  to  risk 
loss  of  position  for  the  sake  of  protecting  the  bank. 
Each  one  of  the  employees,  being  dependent  on  him  for 
promotion  and  increase,  is  intent  upon  keeping  his  good 
will.  If  a  clerk  stumbles  upon  something  suspicious, 
there  is  often  no  safe  way  of  discovering  whether  or  not 
a  fraud  is  on  the  way.  To  say  anything  to  the  directors 
would  be  risky,  as  they  might  not  attach  any  importance 
to  the  story;  and  if  they  did  it  might  turn  out  that  no 
fraud  had  been  committed,  and  the  too  zealous  clerk 
would  likely  lose  his  position. 

EXTERNAL  EXAMINATION  AS  A  PREVENTIVE  OF  FRAUD 

Some  readers  will  perhaps  think  it  strange  that  no  men- 
tion has  as  yet  been  made  of  the  examinations  of  the 

12 


DEFALCATIONS    AND    FRAUDS 

banks  by  the  Comptroller's  officers  as  a  preventive  of 
fraud.  The  truth  is  that  these  examinations  cannot  pre- 
vent defalcation.  The  examiner  may  discover  a  fraud 
after  it  is  committed;  that  is  about  all  he  can  do.  He 
calls  at  the  bank  only  about  twice  a  year,  and  his  visits 
do  not  last  more  than  a  day  or  two  days.  A  more 
thorough  examination  or  inspection  than  that  of  the 
regular  bank  examiners  is  provided  by  the  clearing-house 
associations  of  some  of  the  principal  cities.  Regarding 
the  examinations  by  the  Chicago  Clearing  House  officers, 
Mr.  James  B.  Forgan,  the  president  of  the  First  National 
Bank  of  Chicago,  had  this  to  say,  in  addressing  the  Michi- 
gan Bankers'  Association  in  July,  1909:  "The  (regular) 
bank  examiners  go  round  on  an  average,  I  believe,  of 
twice  a  year.  In  Chicago,  with  one  examiner  with  five 
assistants,  it  takes  fully  a  year  to  get  around  the  banks. 
That  shows  you  how  much  more  thoroughly  we  go  into 
the  business  than  the  Government  does.  It  takes  us  the 
whole  year  to  get  around,  but  we  go  in  with  the  key  so 
far  as  supervision  is  concerned — the  key  to  lock  the  stable 
after  the  horse  is  gone." 

PREVENTION  MUST  COME  FROM  WITHIN 

When  a  thorough  system  of  examination  like  that  of 
the  Chicago  Clearing  House  cannot,  on  the  admission  of 
an  expert  of  Mr.  Forgan's  standing,  prevent  a  high  officer 
of  a  Chicago  bank  from  absconding  with  the  bank's  money, 
it  is  idle  to  expect  the  Government  examinations  to  pre- 
vent defalcations.  Every  intelligent  banker  knows  that 
the  preventive  force  must  reside  in  the  bank  itself.  It 
must  be  there,  in  active  working  order,  every  day  and  all 
through  the  year.  That  is  exactly  what  the  branch 
system  of  banks  makes  possible.  If  the  banking  busi- 
ness of  the  United  States  were  in  the  hands  of  some  two 
hundred  banks,  each  of  which  operated  numerous  branches, 
it  would  come  about,  in  all  probability,  that  every  bank- 


A    RATIONAL    BANKING    SYSTEM 

ing  office  in  the  country  would  be  subjected  to  a  scientific 
code  of  regulations,  designed  to  prevent  or  hinder  frauds 
by  the  employees;  and  the  manager  or  head  of  every 
branch  would  be  subjected  to  checks  which  would  make 
it  difficult,  if  not  impossible,  for  him  to  rob  the  bank  with- 
out being  at  once  detected.  The  experts  in  the  head 
office  devise  the  rules  and  the  routine  that  shall  prevail, 
and  every  branch  belonging  to  the  system  must  order  its 
affairs  in  consonance  therewith.  When  the  bank's  in- 
spectors go  round  one  of  their  important  duties  is  to  re- 
port on  the  way  in  which  the  rules  are  observed.  An 
office  in  which  discipline  is  not  enforced,  or  regulations 
not  observed,  is  looked  upon  as  being  specially  open  to 
loss  by  defalcation. 

CHECKS  UPON  THE  BRANCH  MANAGER 

At  each  branch  there  is  appointed,  in  addition  to  the 
manager,  an  officer  styled  the  accountant,  who  ranks  im- 
mediately after  the  manager,  and  who  is  responsible  con- 
jointly with  him  for  the  proper  conduct  of  the  office. 
Dual  custody  of  all  cash  and  securities  is  provided  for 
and  enforced.  Two  locks,  each  with  an  individual  key, 
or  two  combinations,  are  provided  for  the  compartment 
^  of  the  safe  used  by  these  officers.  Each  has  a  key  or  a 
combination.  Nothing  may  be  put  in  or  taken  out  ex- 
cept in  the  presence  of  both.  All  checks,  drafts  on  cor- 
respondents, etc.,  must  be  signed  by  both.  Thus  the 
branch  manager  has  not  the  same  opportunity  to  steal 
the  bank's  money  as  the  heads  of  many  independent  local 
banks  possess.  His  accountant  and  the  other  men  all 
feel  that  they  are  in  the  service  of  the  bank,  and  that  their 
allegiance  is  due  to  it  rather  than  to  the  manager.  All 
of  them,  perhaps,  expect  that  they  will  be  branch  man- 
agers themselves  before  very  long.  In  nearly  every  case 
they  can  be  depended  on  to  detect  and  frustrate  attempts 
of  the  manager  to  defraud  the  bank. 

14 


DEFALCATIONS    AND    FRAUDS 
CHECKS  UPON  MINOR  OFFICERS  AND  CLERKS 

Then,  as  regards  frauds  by  minor  officers  and  clerks, 
an  elaborate  system  of  checking,  calling  off,  switching  of 
men  from  one  post  to  another,  and  from  one  branch  to 
another,  is  a  necessary  part  of  the  operation  of  every 
large  branch  bank.  Owing  to  this  it  is  the  case  that  a 
given  amount  of  business  transacted  by  a  Canadian 
branch  bank  occasions  more  labor  than  the  same  busi- 
ness would  in  a  United  States  bank.  But  it  is  reasonably 
certain  that  the  relatively  greater  freedom  from  frauds 
and  defalcations,  and  the  consequent  higher  estimation 
in  which  the  public  holds  the  banks,  constitute  a  sufficient 
compensation  for  the  larger  outlay  thus  occasioned. 

EFFECTS  OF  INTERNAL  INSPECTION 

In  addition  to  the  interior  mechanism  of  the  branch 
itself,  designed  to  stop  frauds,  there  are  other  potent 
factors  working  in  the  same  direction.  One  is  the  system 
of  inspection,  which  is  superior  to  anything  of  the  kind 
that  could  be  devised  under  the  system  of  isolated  single- 
office  banks.  It  was  remarked  that  the  inspection  by 
the  clearing-house  associations  in  the  United  States  could 
be  taken  as  more  thorough  than  the  inspection  by  the 
Government.  It  can  fairly  be  said  that  owing  to  the 
existence  of  the  branch  system  the  inspection  of  the 
branch  offices,  as  practised  in  Canada,  is  more  thorough 
again  than  the  inspection  practised  by  the  clearing-houses 
in  the  large  United  States  cities.  It  is  so  because  the 
Canadian  examiners  are,  like  the  clearing-house  exami- 
ners, experts  in  banking,  and  because  they  have  a  more 
intimate  knowledge  of  the  affairs  of  the  offices  they  in- 
spect, and  a  greater  power  and  authority  to  correct  loose 
practices.  The  bank  examiner  in  the  United  States, 
whether  employed  by  the  Government  or  by  the  clearing- 
house, is  an  outsider;  and  the  officers  and  clerks  of 

15 


A    RATIONAL    BANKING    SYSTEM 

each  bank  he  examines  will  be  careful  to  keep  many  im- 
portant details  out  of  his  ken.  The  inspector  who  over- 
hauls the  Canadian  branch  is  in  the  service  of  the  bank, 
and  is  therefore  entitled  to  the  most  intimate  knowledge 
of  the  affairs  of  the  branch.  He  is  in  the  confidence  of 
the  chief  executive,  and  he  comes  to  the  branch  well  posted 
as  to  the  business  done  and  the  relations  with  the  larger 
customers. 

POWER  OP  THE  BANK'S  OWN  INSPECTOR 

Then,  as  to  recommendations :  a  Federal  or  state  govern- 
ment examiner,  or  a  clearing-house  examiner,  may  make 
recommendations  that  certain  things  be  done,  and  if  the 
matters  are  regarded  as  important,  he  may  demand  and 
perhaps  get  compliance  with  his  wishes  sooner  or  later; 
but  as  regards  matters  of  routine,  and  the  minor  details 
of  daily  practice,  he  obviously  has  not  as  strong  a  call  or 
right  to  interfere  as  has  the  branch-bank  inspector. 

As  a  subsequent  chapter  will  deal  with  the  whole  ques- 
tion of  bank  inspection  or  examination,  and  with  the 
question  of  the  supervision  of  the  head  offices  of  branch 
banks,  it  is  not  necessary  to  enlarge  upon  those  matters 
now.  Enough  has  been  said  to  show  that  the  placing  of 
all  the  bank  offices  under  uniform  sets  of  rules  as  to  daily 
practice,  and  the  enforcement  of  an  efficient  internal  in- 
spection, constitute  an  important  deterrent  influence 
against  fraud  by  the  employees.  Under  the  branch 
system  this  factor  would  necessarily  be  developed  to  a 
high  degree  of  efficiency;  it  never  can  be  so  developed 
under  the  present  system  of  single-office  banks. 

MUTUAL  GUARANTEE  OF  FIDELITY 

It  has  been  mentioned  that  more  reliance  can  generally 
be  placed  upon  the  employees  of  a  large  branch  bank  to 
stop  frauds  which  are  attempted  by  the  active  heads  of 
the  banking  offices  because  they  have  a  keener  sense 

16 


DEFALCATIONS    AND    FRAUDS 

of  the  fact  that  they  are  in  the  service  of  the  bank,  and 
not  of  an  individual.  In  connection  with  the  Canadian 
service  there  is  another  thing  which  tends  to  make  all 
ranks  of  the  employees  keen  and  zealous  to  stop  frauds 
by  their  fellows,  whether  those  fellows  be  superior  in 
rank  or  not.  Quite  a  large  proportion  of  the  banks  have 
what  is  known  as  a  "mutual  guarantee  fund"  designed 
to  ensure  the  fidelity  of  the  men.  Whenever  a  bank  in- 
stitutes a  fund  of  this  kind,  all  the  men  are  called  upon 
to  join  it;  and  no  other  bonds  or  sureties  for  their  fidelity 
are  required  from  them.  Each  man  is  bonded  in  the 
fund  for  whatever  sum  his  position  calls  for,  and  out  of 
his  monthly  salary  he  pays  a  rate  per  cent,  as  premium 
(usually  about  half  the  rate  a  fidelity  company  would 
charge).  Then  the  bank  itself  pays  into  the  fund  an 
annual  sum,  debiting  its  current  profits  therefor.  A  num- 
ber of  the  banks  operate  their  guarantee  funds  as  con- 
ditional savings  accounts.  Thus  the  men  pay  in  their 
monthly  assessments,  which  go  to  the  credit  of  the  in- 
dividuals contributing.  So  long  as  no  defalcations  occur 
the  balance  standing  at  the  credit  of  each  employee  is 
regarded  as  being  conditionally  his  property.  If  he  con- 
tributes for  a  specified  time,  generally  about  ten  years, 
he  may,  on  retiring  from  the  service,  withdraw  the  whole 
of  his  payments  provided  no  defalcations  have  taken 
place.  Suppose  an  employee  steals  a  certain  sum  and 
no  recovery  is  made.  The  bank  charges  the  loss  up  to 
the  fund,  if  it  does  not  exceed  the  amount  of  the  bond 
carried  by  the  defaulter,  and  it  is  distributed  among  all 
the  employees  pro  rata  to  the  amounts  of  their  respective 
bonds.  Each  man  has  thus  a  direct  personal  interest  in 
preventing  fraud  by  his  fellows  or  superiors.  Each  one 
knows  that  a  certain  share  of  the  loss  will  come  out  of 
his  pocket  if  one  of  them  succeeds  in  robbing  the  bank, 
and  the  knowledge  tends  to  sharpen  his  watchfulness 
and  to  stiffen  his  attitude  whenever  he  chances  upon 
suspicious  circumstances. 


A    RATIONAL    BANKING    SYSTEM 

THE  PENSION  FUNDS 

Then  the  pension  funds  constitute  another  factor  mak- 
ing for  loyalty  and  efficient  service  on  the  part  of  the 
employees.  Each  man  pays  his  monthly  premium  into 
the  bank's  pension  fund;  the  bank  pays  in  a  yearly 
amount  out  of  its  profits — its  payment  being  equal  to  or 
exceeding  the  aggregate  of  the  staff  payments  during  the 
year.  Out  of  the  fund  so  accumulated  a  regularly  graded 
system  of  pensions  is  kept  up,  under  which  every  em- 
ployee who  has  served  the  stipulated  minimum  term 
(usually  fifteen  years  or  twenty  years)  may  claim  a  pen- 
sion upon  retiring  or  upon  reaching  the  age  limit.  In  the 
case  of  the  pension  fund  also  an  account  is  kept  for  each 
member  of  the  staff,  his  payments  being  credited  therein. 
If  he  leaves  the  bank  or  is  dismissed,  providing  it  is  not 
because  of  a  defalcation  or  shortage,  he  may  withdraw  the 
whole  of  his  payments  with  compound  interest  thereon. 

There  is  no  doubt  that  these  mutual  funds  or  organiza- 
tions, in  which  all  grades  of  the  employees  participate, 
as  well  as  the  banks  themselves,  operate  potently  to  keep 
the  banking  service  clean  and  efficient.  They  are  hardly 
practicable  or  available  for  a  large  number  of  banks 
under  the  single-office  system.  True,  there  are  some  in- 
stitutions in  the  centres  with  staffs  large  enough  to  per- 
mit the  establishment  of  mutual  systems  of  pensions  and 
of  fidelity  insurance;  but  when  the  whole  number  of  a 
bank's  employees  is  less  than  a  score,  and  that  is  the  case 
with  great  numbers  of  banking  institutions,  it  is  obvious- 
ly impracticable  to  inaugurate  either  a  pensioning  or  a 
guaranteeing  arrangement  based  upon  the  mutual  idea. 

SWINDLES,  BURGLARIES,  AND  HOLD-UPS 

It  is  necessary  to  remember  that  banks  are  often  the 
victims  of  frauds  perpetrated  by  others  than  their  em- 
ployees. Swindlers  of  all  kinds,  to  say  nothing  of  bur- 
glars and  hold-up  men,  are  always  on  the  watch  for 

18 


DEFALCATIONS    AND    FRAUDS 

opportunities  of  preying  upon  the  banking  community. 
Though  there  is  a  considerable  amount  of  sympathy  felt 
by  the  general  public  for  a  bank  which  has  been  broken 
into  and  robbed  by  desperadoes,  the  sympathy  of  the 
public  usually  contains  a  measure  of  contempt  when  the 
unfortunate  banker  loses  his  money  through  being  duped 
by  an  artful  swindler.  It  would  not  be  fair  to  strive  to 
make  an  argument  for  branch  banks  out  of  the  numerous 
burglaries  and  hold-ups  perpetrated  upon  the  banks  in 
the  United  States.  These  occur  largely  from  causes  alto- 
gether beyond  the  control  of  the  bankers.  When  they 
are  numerous  and  persistent  in  any  district,  it  is  likely 
to  be  because  the  civil  laws  are  not  enforced  there  in  a 
manner  to  earn  the  respect  of  the  desperate  criminal 
classes.  At  the  same  time  it  might  be  observed,  en 
passant,  that  it  is  quite  probable  that  laxity  of  the  banks 
in  guarding  their  treasures  is  at  the  bottom  of  a  certain 
proportion  of  the  successful  burglaries.  Among  so  many 
banks  it  must  be  that  there  are  always  a  considerable 
number  of  which  the  defences  are  inadequate  or  carelessly 
manned.  For  example,  it  is  reasonably  safe  to  estimate 
that  among  the  twenty -two  thousand  odd  banking 
offices  are  some  hundreds  with  inferior  vault  and  safe 
protection.  Many  of  the  so  -  called  banks,  especially 
in  the  West,  might  with  more  propriety  be  styled  real 
estate  offices  or  insurance  offices.  Even  in  the  East 
there  are  banks  which  occupy  a  corner  in  a  store  or  other 
business  place,  and  are  separated  from  the  crowds  that 
frequent  the  store  counters  by  the  flimsiest  of  railings. 
Some  have  poor  vaults,  and  safes  that  could  hardly  have 
been  considered  up  to  date  twenty  years  ago.  Banks 
with  such  defences  are  of  course  easy  marks  for  burglars. 

How  BRANCH  BANKS  WOULD  DEFEND  THEMSELVES 

If  there  were  large  branch  banks  operating  in  the 
Union  it  could  be  taken  for  granted  that  the  executive 
officer  of  each  one  would  see  to  it  that  every  branch  of 

19 


A    RATIONAL    BANKING    SYSTEM 

his  bank  was  provided  with  a  properly  constructed  vault 
and  a  modern  or  up-to-date  safe.  In  the  Canadian  ser- 
vice the  employees  are  commonly  liable  for  guard  duty, 
which  means  that  one  or  perhaps  two  of  them  will  be 
required  to  sleep  on  the  premises  at  night,  fully  armed  of 
course.  Some  banks  insist  upon  minute  details  at  prac- 
tically all  branches  in  their  scheme  of  defence  against 
burglars.  So  it  can  be  said  that  under  the  branch  system 
the  defences  against  the  burglar-enemy  would  be  kept 
up  all  along  the  line,  and  it  might  be  that  the  newspapers 
would  have  fewer  burglaries  to  report. 

Then  it  is  well  known  that  banks  in  all  countries  are 
obliged  to  be  constantly  on  guard  against  swindlers  of 
various  kinds.  These  swindlers  may  attempt  to  defraud 
through  passing  an  isolated  spurious  item,  or  they  may 
plan  to  bring  off  a  more  extensive  coup.  There  is  swin- 
dling of  an  important  kind  sometimes  in  the  department 
of  loans  and  discounts.  Because  of  their  systematized 
handling  of  the  loans  and  discounts,  and  the  universal 
practice  at  all  offices  of  the  most  modern  safeguards 
against  frauds,  the  branch  banks  are  less  liable  on  the 
whole  to  be  victimized. 

DEFALCATION  OFTEN  RUINS  SMALL  BANKS 

Every  once  in  a  while  one  hears  of  a  bank  in  the  United 
States  being  closed  because  of  crippling  losses  through 
frauds  or  bad  loans.  Under  the  branch  system  there 
would  not  be  so  much  likelihood  of  the  losses  being  in- 
curred; and  if  they  did  occur  they  would  not  be  so  apt 
to  result  in  the  closing  or  crippling  of  the  bank. 

Unnecessary  loss  of  bank  funds  through  the  depreda- 
tions of  burglars  and  swindlers,  and  also  through  lending 
to  dishonest  or  incapable  customers,  plays  its  certain  part 
in  decreasing  the  confidence  which  the  public  has  in  the 
banks.  It  does  more:  It  affects  the  productivity  of 
capital  invested  in  banking,  and  influences  the  rate  of 
interest  which  borrowers  of  all  kinds  must  pay. 

20 


II 

THE   COST   OF  SINGLE-OFFICE   BANKS 

OPERATING  TWENTY-TWO  THOUSAND  ORGANIZATIONS 

THE  next  count  to  be  pressed,  in  the  indictment  of 
the  local  single-office  banks,  is. jtheir ;  excessive -_cos£. 
One  need  not  be  a  banking  expert  to  see  plainly  that 
twenty-two  thousand  separate  organizations,  each  with 
its  cashier,  vice-president,  president,  board  of  directors, 
and  full  paraphernalia  of  executive  control,  must  cost 
more,  in  respect  of  administration  and  operation,  than 
would  two  hundred  organizations  with  an  average  of  one 
hundred  and  ten  branches  to  each.  In  the  latter  case,  at 
every  one  of  the  twenty-two  thousand  branches,  one 
officer — the  branch  manager — would  perform  the  func- 
tions which  under  the  non-branch  system  call  for  the 
services  of  cashier,  vice-president,  president,  and  board. 
If  it  be  supposed  that  a  change  were  to  take  place  on  a 
certain  fixed  date,  by  Act  of  Congress,  from  the  independ- 
ent system  to  the  branch  system,  and  the  twenty-two 
thousand  independent  offices  were  to  become  twenty- 
two  thousand  branches  of  two  hundred  great  banks,  it 
would  mean  the  abolition  of  about  twenty-two  thousand 
presidents,  twenty-two  thousand  vice-presidents,  and  (al- 
lowing an  average  of  six  directors  to  a  bank)  of  about 
one  hundred  and  thirty  thousand  directors. 

OPERATING  Two  HUNDRED  BRANCH  BANKS 

Allowing  to  each  one  of  the  two  hundred  branch  banks 
an  average  of  fifteen  directors,  the  requirements,  in  the 

21 


A    RATIONAL    BANKING    SYSTEM 

way  of  representation  for  the  stock  comprising  the  capital 
of  the  banks,  would  be  three  thousand  directors,  two 
hundred  vice-presidents,  and  two  hundred  presidents. 
Can  anybody  doubt  that  there  would  be  a  substantial 
annual  saving  effected?  There  is  reason  to  suppose  that 
the  saving  might  amount  to  between  $15,000,000  and 
$20,000,000  a  year.  The  higher  figure  would  represent 
an  average  net  economy  of  a  little  over  $900  per  year  for 
each  banking  office;  and  that  does  not  seem  an  ex- 
travagant estimate.  Of  course  it  is  to  be  remembered 
that  the  cost  of  the  two  hundred  executives  required 
under  the  branch  system  would  be  an  important  item. 
There  would  be  some  executive  officers  commanding  very 
high  salaries;  there  would  be  the  cost  of  inspection  of 
branches  and  the  cost  of  the  other  executive  machinery 
necessary  for  operating  large  branch  systems.  The 
branch  system  would  also  necessitate  the  consumption  of 
a  considerable  amount  of  stationery  in  the  numerous  re- 
ports and  statements  which  the  branches  would  be  con- 
tinually obliged  to  furnish  to  the  head  offices;  and  the 
preparation  of  those  statements  would  necessitate  extra 
labor  at  the  branches  and  so  increase  the  item  of  clerk 
hire.  If  it  were  not  for  these  items  perhaps  the  annual 
saving  effected  through  centralizing  the  management  and 
control  might  be  placed  well  above  the  average  of  $900  per 
banking  office.  I  venture,  here,  to  suggest  that  an  execu- 
tive capable  of  managing  a  large  branch  system  could 
probably  be  had  at  a  cost  not  exceeding  very  much,  if 
at  all,  that  now  incurred  in  the  administration  of  any  one 
of  several  large  and  powerful  banks  in  New  York  and 
Chicago  which  have  but  the  single  office. 

PRACTICE  OF  BRANCH  BANKS  WOULD  BE  BETTER 

Even  if  it  could  be  shown  that  it  would  cost  fully  as 
much  to  administer  and  operate,  with  branch-bank 
machinery,  the  volume  of  business  now  handled  by  the 

22 


THE    COST    OF    SINGLE-OFFICE     BANKS 

single-office  banks,  it  might  still  be  argued  that  the 
change  would  result  in  a  vast  economy.  For  at  hundreds 
of  places  the  reins  would  be  taken  from  weak,  incapable 
hands,  and  assumed  by  strong  and  able  men.  Nobody 
has  any  idea  as  to  the  amount  of  the  annual  losses  from 
bad  loans  and  from  bad  banking  methods  under  the 
present  system.  It  must  be  an  appalling  total.  I  am 
aware  that  in  Canada  the  best  conducted  banks,  with  all 
the  skill  and  experience  of  their  officers,  are  not  able  to 
escape  heavy  losses  from  bad  debts.  Any  year  a  large 
Canadian  bank  might  have  to  write  off  $100,000,  or 
double  that  sum,  on  account  of  loans  that  turned  out 
badly.  And  in  their  cases  there  are  no  local  boards  to 
insist  upon  the  bank's  funds  being  applied  to  bolster  up 
sickly  local  industries.  It  would  seem  that  the  losses 
from  this  cause  in  the  United  States  must  amount  to 
many  times  the  Canadian  total.  Most  of  the  losses  so 
incurred  never  find  their  way  into  published  statistics. 
They  are  written  off  before  the  annual  meetings,  and 
serve  to  reduce  the  published  profits,  in  some  cases  to 
wipe  them  out  altogether.  It  is  only  when  a  bank's 
losses  are  so  severe  as  to  impair  its  capital  or  its  safety, 
and  the  stockholders  are  unable  or  unwilling  to  repair 
the  breach,  that  the  public  comes  to  a  knowledge  of  its 
misfortunes.  It  should  be  clear  that  when  the  share- 
holders' losses  are  excessive  the  fact  malevolently  affects 
both  bank  borrowers  and  bank  depositors.  Bearing  this 
in  mind,  we  may  now  proceed  to  examine  the  record  of  the 
single-office  banks  in  regard  to  insolvencies. 

THE  RECORD  OF  FAILED  NATIONAL  BANKS 

The  1909  Report  of  the  Comptroller  of  the  Currency 
states  that  between  1865  and  1909  five  hundred  and  eight 
national  banks  were  placed  in  the  hands  of  receivers. 
Twenty-four  were  restored  to  solvency  and  permitted  to 
liquidate  or  to  resume  business.  At  the  date  of  the  report 

23 


A    RATIONAL    BANKING    SYSTEM 

sixty-eight  receiverships  were  still  open.  Thus  there 
were  four  hundred  and  sixteen  insolvencies  of  which  the 
affairs  had  been  finally  settled.  It  is  hardly  necessary  to 
go  back  so  far  as  1865.  A  better  and  fairer  illustration 
can  be  had  through  taking  the  record  of  insolvencies  since 
1890.  That  will  give  a  period  covering  the  1893  panic, 
the  years  of  depression  that  followed  it,  and  the  succeed- 
ing era  of  prosperity  which  continued  into  1907.  Follow- 
ing is  a  table  of  the  insolvencies  among  the  national  banks 
since  1890  (see  page  356  of  the  Report  of  the  Comptroller 
of  the  Currency,  1909): 

NATIONAL  BANKS  CLOSED 


Number 

Amount  of 

Assets 

Assets 

Year 

of 

Claims 

Estimated 

Estimated 

Banks 

Proved 

Doubtful 

Worthless 

1891 

25 

$   6,780,646 

$   3,578,041 

$3,°°5,495 

1892 

17 

10,860,890 

7,152,617 

J,938,735 

1893 

65 

14,434,105 

10,164,830 

7,217,412 

1894 

21 

3,771,200 

3,390,690 

1,846,149 

1895 

36 

6,078,734 

5,477,277 

3,477,914 

1896 

27 

6,724,197 

4,792,160 

3,187,315 

1897 

38 

19,576,398 

8,787,653 

8,664,997 

1898 

7 

2,625,988 

800,403 

1,717,968 

1899 

12 

1,518,124 

875,683 

704,842 

1900 

6 

5,579,842 

4,733,498 

1,740,629 

1901 

ii 

5,774,274 

2,810,945 

516,811 

1902 

2 

345,665 

267,718 

164,152 

1903 

12 

3,794,993 

1,839,073 

925,209 

1904 

20 

5,044,157 

3,125,538 

1,711,712 

22 

10,023,442 

5,658,029 

1,831,418 

1906 

8 

1,111,302 

616,501 

811,619 

1907 

7 

4,453,825 

3,180,517 

453,  *33 

1908 

24 

13,797,606 

i3,I94,357 

2,646,615 

1909 

9 

852,826 

976,271 

369    $123,988,860 

An.  average,     19  6,525,729 


$81,298,556     $43,538,396 
4,278,766         2,291,495 


1 8  banks  were  restored  to  solvency. 

7  banks  were  formerly  in  voluntary  liquidation. 

4  banks  mentioned  above  failed  for  the  second  time. 

NATIONAL  BANK  DEPOSITORS  LOSE  $1,155,706  PER  YEAR 

This  table  includes  all  the  national  banks  closed  during 
the  period  under  review.     The  amount  of  loss  ultimately 

24 


THE    COST    OF    SINGLE-OFFICE    BANKS 

inflicted  upon  depositors  cannot  be  stated  exactly,  be- 
cause among  the  three  hundred  and  sixty-nine  banks 
taken  into  the  table  are  the  institutions  of  which  the 
assets  had  not  been  liquidated  at  the  date  of  the  Comp- 
troller's report.  But  it  is  possible  to  estimate  roughly 
what  the  result  will  be  when  all  the  receiverships  are 
closed.  The  Comptroller  gives,  on  page  83  of  his  1908 
report,  the  results  of  liquidation  of  the  four  hundred  and 
one  banks  of  which  the  affairs  were  finally  settled  at  the 
date  of  the  report.  The  net  loss  to  depositors  was  17.71 
per  cent,  on  the  amount  of  claims  proved.  Assuming 
that  there  will  ultimately  result  a  loss  of  17.71  per  cent, 
upon  the  $123,988,860  of  claims  proved,  as  shown  in  the 
above  table,  the  loss  works  out  $21, 958, 427,  or  an  average 
of  $1,155,706  per  year. 

The  two  columns  "Assets  Estimated  Doubtful"  and 
"Assets  Estimated  Worthless"  are  given  because  of  the 
light  they  throw  upon  the  matter  of  the  capability  and 
honesty  of  the  bankers  whose  institutions  were  thrown 
into  insolvency.  The  assets  claimed  by  the  three  hun- 
dred and  sixty-nine  banks  in  the  table  were  classified  as 
follows  by  the  receivers  on  taking  charge : 

Estimated  good,  $84,831,904     =     40  per  cent. 

Estimated  doubtful,  81,298,556     =     39  per  cent. 

Estimated  worthless,  43,538,396     =     21  percent. 

$209,668,856     =   100  per  cent. 

It  is  a  well-known  fact  that  the  assets  of  a  bank  becom- 
ing insolvent  usually  look  their  best  on  the  day  the  doors 
are  closed.  Except  in  the  cases  of  a  few  special  items 
they  generally  deteriorate  steadily  in  value  as  the  liquida- 
tion proceeds ;  and  it  is  necessary  to  revise  in  a  downward 
direction  the  estimates  of  what  the  estate  will  produce. 

LOSSES  THROUGH  BAD   LOANS  AND  INVESTMENTS 

By  studying  the  results  of  the  liquidation  of  those 
failed  banks  of  which  the  receiverships  are  closed,  one 

25 


A    RATIONAL    BANKING    SYSTEM 

may  arrive  at  an  estimate  of  the  loss  that  will  result  from 
the  liquidation  of  the  $209,668,856  of  assets  here  referred 
to.  In  his  1908  report  the  Comptroller  gives  the  result 
of  liquidation  of  the  four  hundred  and  one  receiverships 
which  had  then  been  ended  (see  page  383)  .  Their  assets 
on  suspending  were  thus  classified: 

Estimated  good,  $92,180,219 

Estimated  doubtful,  82,525,637 

Estimated  worthless,  51,702,219 

$226,408,075 


After  suspension  additional  assets  amounting  to  $36,- 
024,761  were  received  by  the  liquidators,  making  altogether 
$262,432,836  which  came  into  their  hands.  The  loss  on 
assets  compounded  or  sold  under  order  of  court  amounted 
to  $98,013,857.  From  the  whole  mass  of  assets  the  re- 
ceivers collected  $129,047,946,  and  they  allowed  $19,899,- 
259  in  offsets,  making  total  realizations  of  $148,947,205, 
or  a  trifle  over  56§  per  cent,  of  the  amount  which  came 
into  their  hands. 

Now,  in  the  cases  of  the  three  hundred  and  sixty-nine 
banks  that  have  failed  since  1890,  the  receivers  acquired 
$32,056,623  of  additional  assets  after  suspension.  Adding 
this  amount  to  the  $2  09,  668,  856  of  assets  which  were  there 
when  the  doors  closed,  there  results  the  sum  of  $241,  725,- 
479  for  the  receivers  to  account  for.  Assuming  that  57 
per  cent,  will  be  collected  (which  is  a  slightly  better  ratio 
than  actually  occurred  in  the  cases  of  the  terminated  re- 
ceiverships up  to  1908),  the  realizations  would  amount  to 
$137,783,523,  and  the  worthless  or  nearly  worthless 
residue  would  be  $103,841,956.  Let  us  put  these  results 
into  a  shape  to  be  understood  by  the  man  in  the  street. 
They  mean  that  in  the  nineteen  years  ended  October, 
1909,  three  hundred  and  sixty-nine  national  banks  failed. 
On  closing  their  doors  they  had  an  aggregate  of  $209,668,- 
856  of  assets  representing  their  loans  and  investments. 

26 


THE  COST  OF  S  I  NGLE -O  FFI  CE  BANKS 

These  loans  and  investments,  after  being  fortified  by  the 
$32,056,623  of  additional  assets  which  the  receivers  man- 
aged to  get,  presumably  from  debtors  and  shareholders, 
yielded,  or  rather  will  yield  on  the  completion  of  the  re- 
ceiverships, only  $137,783,523. 

LOSSES  OP  BANKS  THAT  DID  NOT  FAIL 

This  record  was  achieved  by  the  three  hundred  and 
sixty-nine  banks  whose  directors  and  shareholders  could 
not  or  would  not  put  up  the  cash  or  securities  required 
to  avert  failure.  If  to  the  sum  of  their  losses,  through 
bad  loans  and  investments,  were  added  the  losses  made 
by  the  banks  which  escaped  suspension  "by  the  skin  of 
their  teeth,"  so  to  speak,  or  in  the  cases  of  which  the 
directors  and  shareholders  were  forced  to  dip  deep  into 
their  pockets  for  fresh  capital  to  replace  what  was  lost, 
a  very  formidable  total  would  evolve. 

Of  these  losses  the  principal  part  fell  to  the  stock- 
holders. As  there  are  no  means  of  calculating  or  estimat- 
ing the  annual  wastage  of  capital  resulting  from  bad  loans 
made  by  the  national  banks,  or  from  bad  banking  on  their 
part,  it  is  necessary  to  rest  content  with  setting  down  the 
foregoing  figures.  So  far  as  the  creditors  are  concerned 
the  table  of  failures  shows  that,  judging  by  the  experience 
of  the  nineteen  years  from  1891  to  1909,  the  people  of 
the  United  States  may  expect  that  each  year,  on  the 
average,  nineteen  national  banks  will  be  closed;  that 
there  will  be  locked  up  for  an  indefinite  period  (any- 
where from  six  months  to  three  years)  a  sum  at  least 
equal  to  $6,525,729,  and  of  this  sum  $1,155,706  will  be 
ultimately  lost. 

STATE  AND  PRIVATE  BANK  FAILURES 

The  record  of  the  state  and  private  banks  and  trust 
companies  is  much  worse.     The  following  table  of  failures 
3  27 


A    RATIONAL    BANKING    SYSTEM 

of  banks  other  than  national  is  taken  from  page  58  of  the 
Comptroller's  1909  report: 


1891  44      $  6,365,198     $  7,190,824 

1892  27  3,227,608  2,719,410 

1893  261  46,766,818  54,828,690 

1894  71  7,218,319  7,958,284 

1895  115  9,010,584  11,276,529 

1896  78  7,5I3>837  10,240,244 

1897  122  24,090,879  17,929,163 

1898  53  7,080,190  4,493,577 

1899  26  10,448,159  7,790,244 

1900  32  11,421,028  7,675,792 
i9°i  56  13,334,629  6,373,372 

1902  43  10,332,666  7,323,737 

1903  26  4,005,643  2,166,852 

1904  102         31,774,895        24,296,823 

i9°S      57       10,273,023       6,970,345 
*9°6      37        7,l87,858       6,591,515 

1907  34       22,165,448      13,037,497 

1908  132      209,835,443     177,073,348 

1909  60       25,190,156      15,760,177 

1,376  $467,242,381  $391,696,423 

Annual  average,       72  24,591,704 

I  have  not  included  in  the  above,  seventy  failures  not 
dated,  which  occurred  between  1865  and  1896. 

RESULTS  OP  LIQUIDATIONS 

Statistics  of  losses  to  depositors  are  not  available,  but 
in  the  report  it  is  stated  that  in  1896  the  then  Comp- 
troller secured  a  list  of  banks  which  failed  in  each  state 
from  1864  to  1896,  and  investigated  the  results  of  the 
liquidation.  The  twelve  hundred  and  thirty-four  mak- 
ing up  this  list  had  at  suspension  liabilities  of  $220,629,- 
988,  and  nominal  assets  of  $214,312,190.  On  claims 
proved  dividends  were  paid  to  the  amount  of  $100,088,- 
726,  or  45.4  per  cent,  of  the  aggregate  liabilities.  There 
is  one  circumstance  which  would  make  it  unfair  to  apply 
that  ratio  to  the  liabilities  shown  in  the  foregoing  table: 
It  is  well  known  that  the  large  total  shown  for  1908  arose 

28 


THE  COST  OF  S  I  N  OLE -O  FFI  CE  BANKS 

through  the  suspension  of  a  number  of  banks  and  trust 
companies  of  considerable  importance  in  New  York  City 
which  closed  their  doors  during  the  panic,  and  were  after- 
ward restored  to  solvency  through  the  contribution  of 
fresh  capital  by  their  stockholders.  It  is  but  right, 
therefore,  that  any  calculation  of  loss  to  depositors  should 
take  cognizance  of  this  circumstance.  Probably  it  will 
be  conceded  that  an  allowance  of  $100,000,000  will  be 
ample.  Assuming,  then,  that  $100,000,000  of  the  liabili- 
ties shown  for  1908  would  be  redeemed  without  loss,  and 
reducing  the  aggregate  by  that  amount,  there  remains 
the  sum  of  $367, 242, 381  to  which  the  ratio  of  45  per  cent. 
might  apply.  Thus  $165,259,071  results  as  the  probable 
sum  of  the  dividends  paid,  or  to  be  paid  on  the  claims 
proved.  In  other  words,  the  loss  to  depositors  would 
approximate  $201,983,310  in  the  nineteen  years  ended 
1909,  providing  the  ratio  of  recoveries  from  the  assets 
turns  out  to  be  the  same  for  the  period  1890  to  1909  as  it 
was  for  the  period  1864  to  1896.  If  the  recoveries  during 
the  period  1896  to  1909  be  judged  according  to  the  ratio 
of  nominal  assets  to  total  liabilities,  the  dividends  to 
creditors  would  appear  to  amount  to  a  less  percentage 
of  the  liabilities  than  was  paid  in  the  period  1864  to  1896. 
In  the  earlier  period — 1864  to  1896 — the  liabilities  were 
$220,629,988,  while  the  nominal  assets  were  $214,312,190, 
or  97  per  cent,  of  the  liabilities.  In  the  later  period — 
1896  to  1909 — the  liabilities  were  $387,140,017,  and  the 
assets  were  $297,482,442,  or  only  77  per  cent,  of  the 
liabilities.  However,  I  have  estimated  that  the  recov- 
eries from  1896  to  1909  would  be  on  the  same  ratio  as  in 
the  earlier  period. 

DEPOSITORS   LOSE  $11,786,407  PER  YEAR 

Summing  up,  it  is  seen,  if  these  calculations  are  cor- 
rect, that  the  depositors  in  and  creditors  of  banks  other 
than  national  have  to  expect  in  the  future,  judging  by 

29 


A    RATIONAL    BANKING    SYSTEM 

past  records,  that  there  will  be  on  the  average  seventy- 
two  banks  becoming  insolvent  every  year,  locking  up 
$24,591,702  of  depositors'  funds;  and  that  $10,630,701 
of  the  locked-up  funds  will  be  ultimately  lost.  Con- 
solidating the  two  exhibits — that  of  the  national  banks 
and  that  of  the  state-controlled  banks — the  following 
results:  The  people  of  the  United  States  may  expect 
that  each  year  an  average  of  ninety-one  banks  will  close 
their  doors,  locking  up  $31,117,433  of  their  depositors' 
funds,  and  that  $11,786,407  of  the  funds  so  locked  up 
will  be  irretrievably  lost.  When  the  loss  to  depositors 
is  so  heavy  as  this  it  may  safely  be  assumed  that  the 
loss  to  stockholders  is  very  large. 

LOSSES   OP  DEPOSITORS   IN  BANKS  WHICH  WERE   NOT 

CLOSED 

But  there  are  other  items:  Account  should  be  taken 
of  the  special  losses  suffered  by  depositors  in  banks  which 
did  not  close  their  doors  in  1893  and  m  i9°7»  but  which 
placed  an  embargo  on  cash  withdrawals.  In  both  those 
years,  as  everybody  knows,  a  considerable  number  of 
banks  refused  to  pay  their  liabilities  in  cash  as  they  ac- 
crued. In  one  sense  the  suspension  of  cash  payments 
represented  the  lock-up  of  a  vast  amount  of  depositors' 
funds.  Business  men  and  others  who  had  funds  placed 
in  the  banks  for  certain  purposes  were  in  some  cases  re- 
fused possession  of  their  own  property  or  were  tendered 
payment  in  a  depreciated  medium.  Many  were  thus 
prevented  from  carrying  on  their  business  advantageously, 
others  from  engaging  in  profitable  enterprises.  The  loss 
which  they  suffered  in  this  manner  is  unquestionably 
chargeable  to  the  banks  which  refused  to  stand  up  and 
honorably  discharge  their  liabilities.  The  discount  or 
loss  which  depositors  suffered,  through  having  to  use  in 
their  payments  depreciated  certified  checks  instead  of 
the  cash  to  which  they  were  entitled,  clearly  constitutes 

30 


THE  COST  OF  S  I  N  OLE -O  FFI  C  E  BANKS 

a  grievance  against  the  banks.  If  the  banks  had  faith- 
fully observed  the  law,  if  they  had  performed  their  part 
of  the  contract  between  themselves  and  their  depositors, 
there  could  have  been  no  premium  for  cash.  If,  in  de- 
fence, it  is  argued  that  the  banks  could  not  have  con- 
tinued paying  cash  without  wholesale  insolvencies,  the 
argument  damns  the  banking  system.  In  banking,  no 
matter  where,  to  suspend  cash  payments  is  the  unfor- 
gettable thing;  the  banker  who  fails  to  respond,  on  the 
instant,  to  the  just  demand  of  his  creditor,  forfeits  a 
measure  of  the  respect  of  his  fellow-bankers  at  home  and 
in  foreign  countries,  and  no  amount  of  arguing  or  explana- 
tion can  set  him  right. 

LOSSES  OP  THE  BORROWING  CLASSES 

Again,  it  is  to  be  observed  that  bank  failures  inflict  loss 
upon  the  borrowing  class  as  well  as  upon  the  depositors. 
When  a  bank  fails  and  is  liquidated  the  customers  in- 
debted to  it  must  pay  to  the  receiver  the  debts  they  owe 
it.  In  the  cases  of  some  borrowers  other  banks  may  be 
induced  to  take  up  the  loans.  In  times  of  disturbance 
that  course  is  exceedingly  difficult ;  and  it  always  happens, 
even  when  conditions  are  normal,  that  some  are  not  able 
in  this  way  to  finance  their  liability  to  the  failed  institu- 
tion, and  have  themselves  to  be  sold  out  or  liquidated, 
sometimes  when  they  are  quite  solvent  and  worthy  of 
credit.  The  inconvenience  and  loss  thus  suffered  by  the 
borrowing  class,  of  which  no  estimate  or  calculation  can 
be  made,  is  to  be  added  to  the  score. 

RESPONSIBILITY  OF  THE  BANKING   SYSTEM  FOR  THESE 

LOSSES 

It  is  next  in  order  to  discuss  the  questions :  How  much 
of  this  annual  loss,  resulting  from  bank  failures  and  sus- 
pension of  cash  payments,  can  fairly  be  charged  against 


A    RATIONAL    BANKING    SYSTEM 

the  system  of  local  single-office  banks?  Would  the  loss 
have  been  greater  or  less  had  the  United  States  possessed 
properly  constituted  and  operated  branch  banks  such 
as  exist  in  other  important  countries?  Some  idea  as 
to  the  answers  can  be  arrived  at  through  taking  ac- 
count of  banking  results  elsewhere  in  the  Anglo-Saxon 
world. 

In  the  British  Isles,  where  the  branch  system  pre- 
vails, failures  of  typical  branch  banks  are  rare.  It  is 
many  years  since  a  really  important  bank  went  down. 
The  Barings,  who  stopped  in  1890,  were  acceptors  of  in- 
ternational bills  and  financiers  rather  than  a  branch  bank. 
So  unusual  are  failures  among  the  representative  institu- 
tions that  depositors  using  any  one  of  the  large  branch 
banks  must  have  come  to  regard  the  risk  of  loss  from  that 
source  as  entirely  negligible.  It  is  not  so  in  the  United 
States.  Many  depositors  there  cannot  tell  with  any  degree 
of  assurance  whether  or  not  their  bankers  will  be  among 
the  number  slated  to  fall  in  each  average  year. 

BANK  FAILURES  IN  CANADA 

Canada's  experience  is  perhaps  more  in  point  than  is 
that  of  the  United  Kingdom.  The  following  table  com- 
prises all  the  bank  failures  in  the  Dominion  between  1890 
and  1909: 

Year  Bank  Liabilities  <££&*, 

1893  Commercial,  Manitoba,  $1,341,251  nil 

1895  Du  Peuple,  6,820,450  $1,236,511 

1899  Ville  Marie,  1,951,346  1,248,818 

1905  Yarmouth,  479,323  nil 

1906  Ontario,  15,229,685  nil 
1908  De  St.  Jean,  556,882 

1908     De  St.  Hyacinthe,  1,182,362 

*  Liquidation  not  completed;  results  to  depositors  not  yet  known. 

If  it  were  not  for  the  bad  showing  of  the  four  French- 
Canadian  banks  the  record  would  show  a  total  clearness 
from  losses  to  creditors.  With  regard  to  the  loss  to  de- 

32 


THE    COST    OP    SINGLE-OFFICE    BANKS 

positors  in  the  Banque  de  St.  Jean  it  is  known  that  it  will 
be  heavy.  Putting  the  loss  at  75  per  cent,  of  the  liabil- 
ities, we  may  set  the  total  at  $417,000.  And  if  it  be  as- 
sumed that  the  Banque  de  St.  Hyacinthe  depositors  lose 
25  per  cent.,  that  would  make  another  $295,000.  Adding 
the  two  items  to  the  loss  suffered  by  depositors  in  the 
Banque  du  Peuple  and  the  Banque  Ville  Marie  a  total 
of  $3,197,329  results  for  the  nineteen  years,  or  an  annual 
average  of  $168,280,  as  compared  with  an  annual  average 
of  $11,786,487  for  the  United  States. 

As  regards  lock-up  of  depositors'  funds,  it  is  to  be  ob- 
served that  in  the  case  of  the  Ontario  Bank  none  occurred. 
On  the  day  the  failure  was  announced  the  Bank  of  Mont- 
real assumed  the  Ontario's  liabilities,  and  at  all  branches 
paid  all  demands  as  presented.  Allowing  for  the  circum- 
stance, the  total  amount  locked  up  in  the  nineteen  years 
was  $12,331,614,  or  an  annual  average  of  $649,032,  as 
compared  with  the  annual  average  of  $31,117,433  shown 
by  the  United  States.  Thus  the  average  annual  lock-up 
in  the  United  States  is  forty-eight  times  as  great  as  occurs 
in  Canada;  the  annual  loss  suffered  by  bank  creditors  is 
seventy  times  as  great  as  in  Canada. 

LOSSES  OF  BANK  STOCKHOLDERS 

This  comparison  applies  only  to  the  creditors  of  banks 
in  the  two  countries.  I  should  like  to  present  a  com- 
parison of  results  to  stockholders,  but  I  cannot  see  how 
a  fair  comparison  can  be  instituted.  I  am  aware  that 
an  eminent  Canadian  banker,  Mr.  H.  C.  McLeod,  of  the 
Bank  of  Nova  Scotia,  does  compare  the  losses  of  bank 
stockholders  in  Canada  with  the  losses  of  holders  of  the 
stock  of  national  banks  in  the  United  States.  He  presents 
his  comparison  as  part  of  his  argument  for  the  institution 
of  external  examination  or  supervision  of  the  Canadian 
banks. 

Mr.  McLeod  makes  the  losses  to  national  bank  stock- 

33 


A    RATIONAL    BANKING    SYSTEM 

holders  in  forty-four  years  to  amount  to  $100,825,239, 
his  process  being  as  follows: 

Aggregate  capital  of  national  banks  becoming  in- 
solvent (to  1908) $82,727,420 

Cash  assessments  on  stockholders 20,974,373 

$103,701,793 
Less  cash  dividends  returned  to  stockholders 2,876,554 

$100,825,239 

Then  he  applies  this  loss  to  the  $930,365,275  of  national 
bank  capital  stock  outstanding  in  1909,  and  makes  the 
percentage  of  loss  n.  The  losses  to  Canadian  bank 
stockholders  in  the  same  period  of  forty-four  years  end- 
ing in  1908  he  estimates  at  $44,700,000;  and  applying 
the  amount  to  the  amount  of  capital  stock  in  1909, 
$94,471,415,  he  gets  a  loss  of  47  per  cent.  Before  com- 
menting on  these  figures  I  might  observe  that  when  the 
losses  as  here  given  are  applied  to  the  average  of  capital 
for  the  forty-four  years  the  results  are  71  per  cent,  of 
average  capital  for  Canada,  and  for  the  national  banks 
17  per  cent,  of  the  average  capital. 

A  PROSPECT  OF  IMMUNITY  FROM  BANK  FAILURES 

There  are  several  reasons  why  I  consider  that  these 
figures  are  not  suitable  as  a  basis  for  comparing  the 
losses  inflicted  on  bank  stockholders  respectively  by  the 
branch  and  single-office  systems  of  banks.  I  concede 
that  the  Canadian  losses  as  stated  may  be  approximately 
correct,  but  I  hold  that  losses  of  national  bank  stock- 
holders are  understated.  The  figure  given  as  represent- 
ing their  losses  does  not  include  the  destruction  of  the 
surpluses  and  the  profit  and  loss  balances,  and  it  does 
not  include  the  fresh  capital  contributed  by  the  stock- 
holders of  banks  remaining  solvent  or  restored  to  solvency. 
As  everybody  knows,  the  Comptroller  is  continually  re- 

34 


THE  COST  OF  S I N GLE -O FF  I  CE  BANKS 

quiring  banks  to  call  up  fresh  capital  to  replace  that  lost. 
Finally,  it  is  to  be  remembered  that  in  this  comparison 
the  cream  of  the  United  States  system  is  set  against  the 
whole  Canadian  system.  If  the  results  for  all  the  state 
banks,  private  banks,  etc.,  could  be  discovered,  I  venture 
to  say  that  the  comparison  would  not  be  unfavorable  to 
the  Dominion,  notwithstanding  the  fact  that  the  Cana- 
dian banks  have  been  free  from  external  supervision. 
There  seems  to  be  some  grounds  for  expecting  that  the 
Canadian  banks  will  before  long  be  placed  under  the  super- 
vision of  an  outside  authority;  and  there  is  fair  ground 
for  agreeing  with  Mr.  McLeod  in  his  contention  that  the 
combination  of  branch  banking,  efficient  internal  in- 
spection, external  supervision,  and  care  in  granting 
charters  for  new  banks,  would  very  likely  abolish  bank 
failures  altogether  in  Canada,  as  it  appears  to  have7 
abolished  them  in  Scotland. 

REDUCTION  IN  NUMBER  OF  CANADIAN  BANKS 

A  fact  in  connection  with  the  Canadian  failure  list,  to 
which  attention  should  be  given,  is  that  five  of  the  seven 
failed  institutions  were  small  localized  banks.  Three — 
the  Yarmouth,  St.  Jean,  and  St.  Hyacinthe — were  dis- 
tinctly of  the  United  States  type.  Judging  by  this 
Canadian  record,  with  the  last  ten  years  absolutely  clear, 
so  far  as  the  typical  branch  banks  are  concerned,  the 
greater  part  of  the  losses  shown  for  the  United  States,  so 
far  as  creditors  are  concerned,  can  fairly  be  placed  against 
the  system  of  local  independent  banks.  Also  there  are 
strong  grounds  for  expecting,  providing  each  country 
holds  to  its  existing  system,  that  the  Canadian  record 
will  get  fairer  and  fairer,  while  that  of  the  United  States 
will  get  darker  and  darker.  The  record  of  Canadian 
disasters  shows  that  since  1890*  nine  banks  have  failed. 

*  The  St.  Stephens  Bank,  a  small  single-office  bank  in  the  Prov- 
ince of  New  Brunswick,  failed  early  in  1910;  and  the  Farmers 
Bank  of  Canada  failed  disastrously  in  December,  1910. 

35 


A    RATIONAL    BANKING    SYSTEM 

In  addition,  twelve  were  absorbed  or  went  into  liquida- 
tion, making  a  gross  reduction  of  twenty-one.  In  the  mean 
time  only  nine  new  banks  have  started.  Thus  a  net  re- 
duction of  twelve  has  been  effected.  At  the  present  time 
the  number  of  banks  in  active  existence  is  twenty-seven. 
The  requirements,  in  the  way  of  capital  subscriptions  and 
cash  payments  on  stock,  are  so  onerous — being  purposely 
made  so  by  the  Dominion  Parliament — and  the  existing 
banks  cover  the  country  so  completely  and  meet  the 
needs  of  the  commercial  community  so  fully,  that  it  is 
a  most  difficult  matter  to  start  a  new  bank  in  Canada. 
Thus  the  situation  in  British  North  America  is  tending 
strongly  toward  further  reduction  of  the  number  of  banks 
and  toward  further  increase  in  the  size  and  strength  of 
the  individual  institutions.  By-and-by  there  will  be, 
very  likely,  perhaps  twenty  great  banks,  each  one  so 
strong  and  well  managed  as  to  reduce  very  much  the 
danger  of  failure. 

RAPID  INCREASE  IN  NUMBER  OP  UNITED  STATES  BANKS 

Look  next  at  the  tendency  prevailing  in  the  United 
States,  and  mark  how  different  it  is.  Following  is  the 
record  for  the  past  five  years  of  the  number  of  banks  in 
operation,  as  taken  from  the  Comptroller's  reports: 

NUMBER   OF  BANKS   IN   THE   UNITED   STATES 


1905 

1906 

1907 

1908 

1909 

Savings, 

I>237 

1,319 

1,415 

i,453 

1,703 

Private, 

1,028 

929 

1,141 

1,007 

1,497 

State, 

7,794 

8,862 

9,967 

11,220 

II,3I9 

National, 

5,833 

6,199 

6,544 

6,853 

6,893 

15,892       17,309       i9,°67       20,533       21,412 

(I  have  not  included  loan  and  trust  companies.  There 
were  ten  hundred  and  seventy-nine  of  them  reporting  to 
the  National  Monetary  Commission  in  1909.) 

The  mill  is  turning  out  new  banks  at  the  rate  of  thirteen 

36 


THE    COST    OF    S  I  N  OLE  -  O  F  F  I  C  E    BANKS 

hundred  and  eighty  per  year,  and  as  yet  there  are  few  in- 
dications that  its  activities  will  be  lessened.  No  fair- 
minded  person  can  deny  that  a  large  number  of  the  new 
banks  created  every  year  are  in  the  hands  of  incompetent 
or  inexperienced  men.  Some  are  in  the  hands  of  down- 
right rogues.  What  hope  is  there  that  supervision,  ex- 
amination, or  inspection  can  stop  or  reduce  the  practice 
of  bad  banking,  the  making  of  bad  loans,  when  the  busi- 
ness is  kept  wide  open  for  all  comers  ? 


DIVERSION  OF  BANK  RESOURCES  INTO  BOND  INVESTMENTS 

But,  though  the  creation  or  coming  into  existence  of 
such  a  vast  number  of  new  banks,  many  of  which  will  be 
ill  managed,  is  thus  certain  to  result  in  the  yearly  recur- 


rence of  frightful  losses,  there  are  no  other  means  of  pro- 
viding facilities  for  the  smaller  places.  It  is  hardly  to  be 
expected  that  a  bank  which  is  organized  in  a  little  place 
of  eight  hundred  or  one  thousand  population  will  be  able 
to  command  the  services  of  officers  who  understand  the 
principles  that  should  govern  the  business.  Yet  unless  it 
is  started  the  locality  must  go  without  a  bank.  The 
branch  system  supplies  banking  offices  for  places  even 
smaller  than  this  and  ensures  strength  and  good  manage- 
ment at  all  points. 

There  is  another  respect  in  which  the  single-office  banks 
of  the  United  States  are  exceedingly  costly.  In  his  ad- 
dress delivered  in  1908  before  the  Economic  Club  of  New 
York,  in  which  he  styled  the  United  States  banking  sys-  ^ 
tern  "the  worst  in  the  world,"  Andrew  Carnegie  quoted 
Mr.  Fowler,  the  then  chairman  of  the  Finance  Committee 
of  the  House  of  Representatives,  as  stating  that  the  loss 
to  the  country,  through  the  diversion  of  banking  capital 
into  Government  bonds,  amounted  to  $150,000,000  an- 
nually. Most  bankers  know  that  one  of  the  chief  reasons 
why  this  costly  diversion  of  capital  has  continued  to  this 
day  is  the  existence  of  such  a  multitude  of  banks,  of  all 

37 


A    RATIONAL    BANKING    SYSTEM 

degrees  of  size,  soundness,  and  strength.  It  is  manifestly 
impossible,  even  for  experts,  to  tell  which  might  safely  be 
trusted.  Therefore,  it  has  been  considered  essential  that 
for  the  issues  of  bank  notes  to  serve  as  currency,  and  for 
the  deposits  entrusted  to  the  banks  by  Government,  some 
specific  security  should  be  required;  and  Government 
bonds  have  seemed  best  fitted  for  the  purpose.  Of  course 
the  evil  of  the  arrangement  lies  in  the  fact  that  the  Govern- 
ment has  appropriated  to  its  own  use  a  huge  loan  fund 
that  would,  under  other  circumstances,  have  been  avail- 
able for  commercial  borrowers.  The  safety  with  which 
the  national  bank  notes  have  been  endowed  has  been  ac- 
quired at  a  considerable  cost;  for,  as  the  national  banks 
must  buy  Government  bonds  in  amount  at  least  equal  to 
their  outstanding  note  circulation,  their  note  issues  do 
not  permit  them  to  increase  their  loans  to  the  public  by 
a  single  dollar.  In  Canada,  owing  to  its  note-issuing 
rights,  each  bank's  power  to  discount  for  its  customers  is 
increased  practically  by  the  amount  of  its  note  circula- 
tion, less  the  cash  reserve  which  experience  teaches  it  to 
hold  against  the  notes — not  more  than  30  per  cent.  This 
means  much  to  the  borrowing  customers  of  the  Canadian 
banks,  and  consequently  to  the  Dominion's  trade. 

CLASSIFICATION  OF  BANK  RESOURCES 

The  matter  of  the  diversion  of  banking  capital  into 
Government  and  other  bonds  goes  deeper  than  the  note 
circulation.  Besides  furnishing  bonds  as  security  for 
Federal  Government  deposits,  the  banks  are  obliged  to 
provide  bonds  as  security  for  state  government  deposits, 
and  in  some  states,  for  the  deposits  of  municipalities. 
The  system  of  banking  itself  induces  a  further  and  en- 
tirely voluntary  investment  in  bonds  and  stocks  in  the 
following  manner:  A  single-office  bank,  established  in  a 
place  where  deposits  exceed  loans,  and  there  are  many 
such  places  in  the  country,  invests  a  considerable  part  of 

38 


THE    COST    OF    SINGLE-OFFICE    BANKS 

the  surplus  in  bonds,  whereas,  under  the  branch  system, 
such  surpluses  would  be  utilized  to  make  advances  to 
commercial  borrowers  at  other  points  where  the  natural 
demand  for  loans  exceeded  the  supply  of  deposits.  The 
tendency  seems  to  be  in  the  direction  of  requiring  and  en- 
couraging the  banks  to  buy  ever  more  and  more  bonds 
for  one  purpose  and  another,  until  there  promises  to  be 
little  left  for  what  should  constitute  the  bulk  of  their 
resources — commercial  paper.  The  following  table,  com- 
piled from  the  summary  of  special  reports  obtained  for, 
and  compiled  by,  the  National  Monetary  Commission, 
shows  how  large  a  proportion  of  the  assets  of  the  banks  is 
invested  in  bonds  and  stocks,  and  loans  on  bonds  and 
stocks : 

TWENTY-TWO  THOUSAND  FOUR  HUNDRED  AND  NINETY-ONE  BANKING 
INSTITUTIONS 28TH  APRIL,  IQOQ 

United     States     bonds $     792,787,71 1 

State,  county,  and  municipal  bonds 1,091,541,455 

Railroad    bonds 1,560,006,360 

Bonds  of  other  public   service  corporations 466,526,687 

Other  bonds   and   stocks 659,873,561 

Foreign  securities 43,706,440 

Total  bonds  and  stocks $  4,614,442,214 

Loans  on  demand  secured  by  collateral 1,939,634,898 

Loans  on  time  secured  by  collateral 2,036,358,417 

Total  resources  applied  to  bonds  and  stocks $  8,590,435,529 

Real  estate,  other  than  premises 95,377,084 

Real  estate  mortgages  owned 1,378,701,565 

Loans  on  real  estate  mortgages  and  liens 1,127,276,405 

Grand  total  applied  to  bonds,  stocks,  and  real 

estate $11,191,790,583 

Grand  total  other  loans  and  overdrafts,  presum- 
ably mercantile 4,891,246,403 

Total  resources 21,095,054,420 

Proportion  resources  applied  to  bonds  and  stocks 41  per  cent. 

Proportion  resources  applied  to  real  estate 12  per  cent. 

Proportion  resources  applied  to  mercantile  loans 23  per  cent. 

In  this  table  I  have  assumed  that  all  loans  under  the 
following  headings  represented  mercantile  advances — viz.: 

39 


A    RATIONAL    BANKING    SYSTEM 

"On  demand,  unsecured  by  collateral,"  "On  time,  with 
two  or  more  names  unsecured  by  collateral,"  "Not 
classified,"  "Overdrafts,  secured  and  unsecured." 

CANADIAN   BANKS'  MERCANTILE   LOANS   RELATIVELY 
LARGER 

The  pitiful  proportion  of  banking  resources  applied  to 
commercial  discounts  is  seen  at  once  when  comparison  is 
made  with  Canada.  Practically  the  whole  of  the  banking 
business  of  the  Dominion  is  in  the  hands  of  the  chartered 
banks,  now  twenty-seven  in  number,  with  some  twenty- 
two  hundred  branches.  On  April  30,  1909,  the  banks  then 
reporting  to  Government  made  the  following  showing : 

CANADIAN    BANKS    3OTH    APRIL,    1909 

Dominion  and  provincial  Government  bonds $  10,419,082 

Canadian    municipal,    and    British,  Foreign,  or  Colo- 
nial public  securities 21,122,206 

Railway  and  other  bonds 51,349,556 

Total  bonds  and  stocks $      82,890,844 

Call  and  short  loans  on  bonds  and  stocks,  Canada.  . .  50,213,960 
Call  and  short  loans  on  bonds  and  stocks,  elsewhere.  114,493,570 

$   247,598,374 

Current  loans  and  discounts  Canada  (mercantile).  . .  .$  524,168,988 
Total  resources $1,025,015,613 

Proportion  resources  applied  to  bonds  and  stocks 24  per  cent. 

Proportion  resources  applied  to  mercantile  loans 51  per  cent. 

It  will  be  easier  to  understand  what  the  diversion  of 
banking  resources  into  bonds,  stocks,  real  estate  loans, 
etc.,  means  to  the  commercial  and  industrial  interests  of 
the  United  States  when  it  is  explained  that  if  the  same 
proportion  of  the  banking  funds  were  applied  to  mer- 
cantile discounts  as  is  so  applied  in  Canada  the  United 
States  banks  would  hold  $10,758,477,754  in  commercial 
paper  instead  of  $4,891,246,403,  as  shown  in  the  table. 
In  other  words,  the  amount  would  be  more  than  doubled. 

It  may  be  objected  by  some  critics  that  inasmuch  as 

40 


THE    COST    OF    SINGLE-OFFICE    BANKS 

the  figures  for  the  United  States  institutions  include  the 
reports  of  savings  bank  and  trust  companies  the  holdings 
of  those  institutions  in  the  Dominion  should  be  taken 
into  the  account.  I  might  explain  that  practically  five- 
sixths  of  the  savings  bank  funds  in  Canada  are  held  by 
the  chartered  banks,  and  that  the  Canadian  trust  com- 
panies, though  they  hold  some  deposits,  may  not  trans- 
act a  banking  business.  However,  it  will  be  interesting 
to  include  the  deposits  of  all  these  outside  institutions 
and  see  how  the  percentages  are  affected.  The  deposit 
holdings  of  the  two  departments  of  the  Government 
savings  banks,  of  the  two  special  savings  banks  in  the 
Province  of  Quebec,  of  the  loan  and  mortgage  companies, 
and  of  the  trust  companies  would  probably  have 
amounted  in  April,  1909,  to  $146,000,000.  Now  I  shall 
assume  that  the  whole  of  this  outside  fund  was  invested 
in  bonds,  stocks,  and  real  estate,  and  in  loans  on  them. 
On  that  basis  the  proportion  of  Canadian  banking  re- 
sources applied  to  bonds,  stocks,  and  real  estate  becomes 
34  per  cent.;  and  the  proportion  applied  to  mercantile 
discounts,  45  per  cent. — the  latter  being  still  nearly  double 
the  proportion  shown  by  the  United  States. 

EFFECTS  OF  THE  DIVERSION  OP  CAPITAL 

The  diversion  of  this  immense  sum  has,  of  course, 
proved  a  great  convenience  for  the  governments  and  cor- 
porations issuing  securities.  It  has  delivered  them  from 
the  necessity  of  applying  to  Europe  for  much  capital. 
Had  they  been  obliged  to  do  so,  th^y  would  doubtless 
have  been  forced  to  render  a  stricter  account  of  their 
affairs.  But  it  is  not  difficult  to  see  that  the  diversion 
has  placed  a  fearful  handicap  on  the  smaller  and  weaker 
members  of  the  mercantile  and  industrial  community. 
The  rich  and  powerful  corporations  can  get  the  banking 
accommodation  they  require.  Not  so  the  little  traders 
and  factory  owners.  If  there  is  a  shortage  they  are  the 
ones  who  must  do  without. 


Ill 

THE   PANICS 
FREQUENCY  OF  PANICS  IN  THE   UNITED  STATES 

BEFORE  passing  definitely  into  the  consideration  of 
the  relations  existing  in  normal  times  between  the 
banks  and  the  general  public,  it  will  be  advisable  to  de- 
vote a  chapter  to  the  subject  of  the  panics,  and  one  to 
a  discussion  of  the  conditions  of  banking  service.  I  have 
already  referred  briefly  in  the  introductory  chapter  to 
the  panics  of  1893  and  1907.  On  both  occasions  cash  pay- 
ments were  suspended  quite  generally  throughout  the 
Union,  bank  failures  were  numerous,  the  banks  ceased 
for  a  time  to  perform  their  ordinary  functions,  and 
financial  conditions  were  entirely  disorganized.  Foreign 
bankers  having  funds  on  deposit  with  the  greatest  banks 
in  the  United  States  were  obliged  to  explain  to  their 
clients  who  purchased  drafts  that  the  drafts  would  be 
paid  not  in  cash  but  in  a  depreciated  medium.  No 
patriotic  American  who  understands  what  really  hap- 
pened on  the  two  occasions,  1893  and  1907,  can  think 
of  either  year  without  shame  and  humiliation.  If  it  were 
possible  to  point  to  other  great  countries  in  which  at  any 
time  during  the  same  period  the  banking  institutions 
failed  in  the  strict  observance  of  their  legal  obligations, 
and  ceased  to  extend  the  customary  support  to  the  in- 
dustrial and  mercantile  interests  of  their  country,  the 
sense  of  humiliation  would  be  appreciably  lessened.  But 
even  this  comfort  is  denied.  Not  a  single  one  of  the  other 
great  countries  has  had  its  financial  honor  tarnished  in 

42 


THE    PANICS 

recent  years  by  a  general  banking  suspension.  Even 
among  the  lesser  states  a  general  suspension  is  a  most 
uncommon  occurrence.  So  far  as  Anglo-Saxon  countries 
are  concerned  the  only  occurrence  of  that  nature  in  the 
last  forty  years  was  the  Australian  breakdown  in  1893. 
For  some  years  prior  to  that  trouble  the  Australian  banks 
had  been  advancing  heavily  on  land  security,  and  had 
been  actively  canvassing  for  deposits  in  England  and 
Scotland  to  provide  the  funds.  When  the  disturbance 
of  1893  finally  reached  the  Antipodes  it  caused  the  stop- 
page of  all  the  banks  save  one.  In  the  subsequent  re- 
construction depositors  in  some  of  the  suspended  banks 
were  obliged  to  convert  certain  classes  of  their  deposits 
temporarily  into  stock. 

CANADA'S  IMMUNITY  FROM  PANICS 

In  Canada,  notwithstanding  that  the  commercial  and 
financial  interests  of  the  country  are  always  closely  in- 
volved with  the  United  States,  no  disturbance  whatever 
took  place  either  in  1893  or  1907.  This  is  the  more  re- 
markable inasmuch  as  at  the  later  date,  when  the  panic 
struck  New  York,  the  Canadian  banks  had  a  large  part 
of  their  reserve  money  employed  there  in  the  shape  of 
call  loans  and  bank  balances.  The  total  so  employed  on 
September  30,  1907,  was  approximately  $60,000,000. 
Yet  in  both  panics,  at  every  banking  office  in  the  Do- 
minion, business  went  on  in  the  regular  way.  Depositors 
drew  cash  as  they  wanted  it;  borrowing  customers  dis- 
counted fresh  paper  and  renewed  old  paper  with  the  same 
freedom  as  they  had  three  and  four  months  before.  The 
banks  did  not  even  exact  the  fifteen  days'  notice  on  time 
deposits  to  which  their  contracts  entitled  them. 

Not  only  did  they  care  for  the  industrial  and  mercantile 

interests  of  the  Dominion,  and  maintain  Canada's  financial 

honor  in  the  eyes  of  the  world,  but  they  rendered  valuable 

assistance  to  many  trading  and  manufacturing  concerns 

4  43 


A    RATIONAL    BANKING    SYSTEM 

in  the  states  immediately  south  of  the  international 
boundary.  At  such  places  as  Niagara  Falls,  Detroit, 
Buffalo,  St.  Paul,  Spokane,  Seattle,  the  notes  of  the 
Canadian  banks  proved  exceedingly  useful  during  the 
time  the  currency  famine  prevailed.  Also  a  number  of 
American  concerns  in  good  credit  were  able  to  save  them- 
selves from  insolvency  or  their  businesses  from  disorganiza- 
tion through  negotiating  with  the  Canadian  banks  the 
loans  which  their  home  institutions  could  not  or  would 
not  grant.  General  suspension  of  banking  payments  is 
something  Canada  has  not  seen  since  the  hard  times  of 
1837.  For  over  seventy  years  the  chartered  banks  have 
stood  up  honorably,  meeting  their  liabilities  in  cash  as 
they  accrued. 

EXPLAINING  THE  PANICS 

But  it  is  time  to  consider  some  of  the  explanations  that 
have  been  offered  as  to  the  peculiar  susceptibility  of  the 
United  States  to  banking  panics,  and  the  peculiar  de- 
structiveness  of  the  panics  that  occur.  One  body  of 
opinion  has  it  that  certain  powerful  interests  in  the  great 
centres  were  guilty  of  wilfully  engineering  the  disturb- 
ances in  order  that  they  themselves  might  derive  personal 
gain.  It  is  not  my  intention  to  waste  any  time  discussing 
so  foolish  a  contention.  Any  man  who  advances  it, 
seriously  believing  it  to  be  true,  brands  himself  as  ignorant 
of  financial  conditions,  and  any  man  who  advances  it, 
knowing  it  to  be  false,  brands  himself  as  a  scoundrel. 

Another  explanation  is  that  the  country  has  suffered 
peculiarly  in  this  respect  because  the  people  have  been 
guilty  of  greater  excesses,  because  they  have  offended 
more  seriously  against  certain  important  economic  laws, 
than  have  the  people  of  other  countries.  Those  who  be- 
lieve that  this  explanation  covers  the  matter  satisfac- 
torily dilate  upon  the  ugly  instances  of  violated  trust  by 
parties  in  high  standing  which  are  made  public  from  time 
to  time,  the  contemptuous  disregard  manifested  by  the 

44 


THE    PANICS 

same  parties  for  some  of  the  commonest  laws  of  decency 
and  honor,  upon  the  successive  bursts  of  wild  speculation 
in  which  Wall  Street  indulges,  and  upon  the  enormous 
extent  to  which  floating  capital  is  converted  into  fixed 
capital  whenever  prosperity  prevails.  "§0,"  they  con- 
clude, "as  we  are  worse  offenders  than  other  nations  in 
these  matters  it  is  but  right  that  our  punishment  should 
be  greater."  They  accept  the  chastisement  as  in  some 
measure  the  hand  of  God,  and  in  some  measure  the  price 
paid  for  an  exceptionally  rapid  industrial  and  political 
development. 

It  would  be  fatuous  to  dispute  the  strength  of  this  con- 
tention. When  the  public  learns  that  men  with  honored 
names,  who  sit  at  the  boards  and  in  the  official  chairs  of 
great  corporations,  have  been  guilty  of  plundering  the 
trusts  they  were  paid  to  protect,  the  circumstances  must 
have  a  weakening  effect  upon  credit  in  general. 

SINGLE-OFFICE  BANKS  THE  REAL  CAUSE  OF  THE  PANICS 

With  regard  to  the  undue  prevalence  of  the  speculative 
spirit  it  is  well  to  remember  that  in  the  United  States 
values,  on  the  whole,  are  increasing  constantly  and 
rapidly;  and  wherever  that  is  the  case  the  speculative 
spirit  is  sure  to  be  strongly  in  evidence.  Also  it  is  well  to 
bear  in  mind,  in  reference  to  the  losses  experienced  in  the 
stock  markets  by  ignorant  outsiders,  that  in  all  the 
world's  centres  the  capitalist-professionals  look  upon  the 
amateur  speculators  as,  to  some  extent,  their  lawful  prey. 
There  is  a  body  of  expert  observers,  apparently  steadily 
increasing  in  numbers,  who,  while  conceding  that  these 
things  have  an  important  effect  as  producers  of  dis- 
turbances, are  inclined  to  regard  them  as  being  after  all 
subordinate  causes.  They  place  upon  the  banking  system 
of  the  country  the  chief  blame  for  the  special  troubles 
which  the  United  States  suffers.  As  the  Republic  is  the 
only  great  country  in  the  world  to  experience  banking 

45 


A    RATIONAL    BANKING    SYSTEM 

suspension  in  recent  years,  so  it  is  the  only  great  country 
in  which  the  banking  business  is  in  the  hands  of  small, 
single-office  institutions. 

Fifty,  seventy-five,  and  one  hundred  years  ago  de- 
structive panics  were  of  frequent  occurrence  in  England. 
Thus  there  was  the  suspension  of  the  Bank  of  England 
during  the  war  with  France  in  the  closing  years  of  the 
eighteenth  century,  in  which  case  cash  payments  were 
partially  resumed  in  1816.  There  was  a  great  banking 
crisis  in  1825,  during  which  sixty- three  country  banks 
went  down,.  There  was  a  very  considerable  pressure  in 
1836,  and  in  1847  a  panic  of  the  first  magnitude  was  en- 
countered. The  American  breakdown  of  1857,  coming 
upon  an  unhealthy  state  of  affairs  in  the  United  King- 
dom, produced  another  great  panic  in  that  year.  Still 
another  came  in  1866.  Since  the  beginning  of  the  last 
quarter  of  the  nineteenth  century  there  has  not  been  a 
single  banking  panic  in  England  in  which  credit  was 
broken  down. 

ENGLAND'S  EXPERIENCE  WITH  SMALL  LOCAL  BANKS 

Now  let  us  review  banking  conditions  in  England  dur- 
ing this  period  of  one  hundred  years.  In  Macleod's 
Theory  and  Practice  of  Banking  it  is  stated  that  at  the 
close  of  the  eighteenth  century  a  multitude  of  country 
banks  started  up  in  all  directions.  "In  the  year  1797 
they  had  been  reduced  to  two  hundred  and  seventy;  in 
1808  they  had  increased  to  six  hundred;  and  in  1810, 
when  the  Bullion  Committee  was  appointed,  they  amount- 
ed to  seven  hundred  and  twenty-one. 

"In  1811  they  were  seven  hundred  and  twenty-eight; 
in  1813  they  had  risen  to  nine  hundred  and  forty." 

One  of  the  leading  English  financial  papers  recently 
remarked,  in  an  article  on  American  banking,  that  the 
system  now  in  vogue  in  the  United  States  is  similar,  in 
some  important  respects,  to  that  prevailing  in  England 

46 


THE    PANICS 

one  hundred  years  ago.  The  description  in  the  Theory 
and  Practice  of  Banking  shows  clearly  where  the  similarity 
lies.  Those  English  banks  which  were  coming  into  exist- 
ence by  scores  a  hundred  years  ago  were  little  local  banks 
of  the  American  type.  Though  some  of  them  operated 
branches,  the  operations  of  each  were  confined,  as  a  rule, 
to  one  small  district.  The  Act  of  Parliament  which  con- 
fined the  right  of  note  issue,  outside  of  the  Bank  of  Eng- 
land, to  partnerships  not  having  more  than  six  members 
operated  to  encourage  the  creation  of  small  local  banks, 
just  as  the  virtual  prohibition  of  branches  operates  in  the 
same  direction  at  the  present  day  in  the  United  States. 

DEVELOPMENT    OF    LARGE    BRANCH    BANKS    INCREASES 
FINANCIAL  STABILITY 

It  is  noteworthy  that  in  the  last  half  of  the  nineteenth 
century  the  number  of  banks  in  England  and  Wales  has 
been  greatly  reduced.  The  process  of  centralization  has 
been  especially  rapid  in  the  last  quarter  of  the  nineteenth 
century  and  in  the  first  decade  of  the  twentieth  century. 
In  less  than  thirty  years  the  number  of  banks  (in  Eng- 
land and  Wales)  has  been  reduced  from  one  hundred  to 
fifty,  chiefly  through  amalgamations  and  absorptions. 

I  do  not  presume  to  say  that  the  disappearance  of  the 
hundreds  of  little  local  banks,  by  absorption,  failure,  and 
liquidation,  accounts  by  itself  for  the  comparative  im- 
munity from  serious  banking  convvilsions  enjoyed  by 
Great  Britain  in  the  last  thirty  years;  but  I  do  con- 
tend that  the  change  in  the  character  of  the  banks  has 
played  a  very  important  part  in  making  the  record 
cleaner.  At  any  rate,  when  the  little  banks  existed  in 
large  numbers  there  was  serious  trouble  in  the  banking 
world  once  in  every  decade;  and  since  the  business  has 
passed  from  their  hands  into  those  of  the  strong  branch 
banks  there  has  been  no  general  banking  breakdown. 
Look  at  the  Baring  crisis  in  1890  for  example,  and  im- 

47 


A    RATIONAL    BANKING    SYSTEM 

agine  what  would  then  have  happened  in  England  if  the 
business  of  the  country,  instead  of  being  in  the  hands  of 
the  great  joint  stock  banks  with  their  numerous  branches, 
had  been  in  the  hands  of  thousands  of  small  local  con- 
cerns. It  is  very  easy  to  see  that  instead  of  aiding  the 
Bank  of  England  at  the  difficult  juncture,  the  small 
banks  would  have  vastly  increased  its  troubles,  as  a 
great  many  of  them  would  have  clamored  for  advances, 
while  at  the  same  time  clutching  all  the  cash  they  pos- 
sibly could.  But,  as  everybody  knows,  the  support 
which  the  joint  stock  banks  gave  the  Bank  of  England 
saved  the  situation. 

THE  PANIC  OP  1907 

However,  there  is  no  need  to  go  abroad  for  proofs  that 
a  system  composed  of  single-office  banks  is  peculiarly 
liable  to  destructive  panics.  All  the  necessary  evidence 
is  to  be  found  in  the  history  of  the  1907  panic  in  the 
United  States. 

When  the  difficulties  of  the  Heinze-Morse  chain  of 
banks  in  New'  York  City  became  public  property,  the  in- 
dividual depositors  of  the  metropolitan  banks,  as  well  as 
their  banking  depositors,  became  somewhat  uneasy  about 
their  balances.  When  the  Knickerbocker  Trust  Com- 
pany closed  its  doors  on  October  24th  their  uneasiness 
was  changed  to  downright  alarm.  In  New  York  City  the 
individual  depositors  of  those  particular  banks  which 
were  connected  in  some  way  with  the  Heinze-Morse  group 
of  financiers  started  a  run  which  afterward  spread  to  other 
institutions.  The  brunt  of  the  battle  fell  upon  the  Trust 
Company  of  America,  and  upon  the  Lincoln  Trust  Com- 
pany. It  was  recognized  in  the  financial  district  of  the 
city  that  a  great  deal  depended  upon  the  result  of  the 
runs  on  those  two  concerns.  If  they  could  be  saved  the 
storm  would  probably  subside  in  a  short  while;  if  they 
closed,  no  one  knew  what  might  happen. 

48 


THE    PANICS 

CASH  WITHDRAWALS  OP  THE  INTERIOR  BANKS 

The  individual  depositors  in  New  York  City  of  the 
great  clearing-house  banks,  and  of  other  banks  not  in- 
volved or  entangled  with  financiers  who  were  under  sus- 
picion, did  not  become  panic-stricken.  Possibly  some  of 
them  who  remembered  1893  took  prompt  measures  to 
withdraw  their  balances  in  the  shape  of  cash,  in  the  ex- 
pectation that  another  suspension  of  payments  would 
ensue,  in  the  course  of  which  cash  would  go  to  a  "pre- 
mium," as  it  did  fourteen  years  before.  But  there  were  no 
runs  on  those  institutions.  So  far  as  the  disturbance  in 
the  city  was  concerned  the  plain  duty  of  the  Clearing- 
House  Association  was  to  lend  cash  support  to  the  trust 
companies  and  banks  that  were  beleaguered,  or  to  such 
of  them  as  were  in  sound  condition.  And  it  did  not  ap- 
pear that  that  task  was  beyond  their  strength.  Under  a 
different  system  of  banking  they  would,  in  all  probability, 
have  done  this  easily;  the  panic  might  have  been  stayed 
and  the  rest  of  the  country  saved  much  of  its  ill  effects. 
But  the  clearing-house  banks  were  not  allowed  to  con- 
centrate their  attention  and  resources  upon  the  spot  in 
their  defences  at  which  the  danger  originated.  Just  at 
the  time  when  to  uphold  the  honor  of  the  nation  it  was 
absolutely  necessary  for  the  banks  to  stand  shoulder  to 
shoulder,  thousands  of  banks  in  the  interior  joined  in  a 
rush  for  the  cash  resources  of  New  York,  which  should 
have  been  left  available  for  fighting  the  panic  in  the  city. 
It  happened  that  the  interior  bankers,  too,  remembered 
1893.  They  remembered  how  in  that  year  the  precious 
reserve  money  which  they  carried  on  deposit  with  great 
banks  in  New  York  was  locked  up  beyond  their  reach,  so 
far  as  cash  withdrawals  were  concerned,  through  the  suspen- 
sion of  payments.  Even  before  the  Knickerbocker  failure 
they  saw  that  events  in  New  York  were  tending  strongly 
toward  another  suspension ;  and  in  self-defence  they  proceed- 
ed to  take  the  very  action  that  made  suspension  inevitable. 

49 


A    RATIONAL    BANKING    SYSTEM 
BANKERS'  BALANCES  IN  NEW  YORK 

Now  let  us  look  for  a  moment  at  the  amount  of  the  bal- 
ances carried  by  other  banks  in  the  national  banks  of 
New  York  City  on  the  eve  of  the  1907  panic.  The  last 
abstract  of  condition  of  national  banks  issued  prior  to  the 
panic  by  the  Comptroller  of  the  Currency  was  that  under 
date  August  22,  1907.  On  that  date  the  New  York  City 
national  banks  held,  according  to  their  reports  to  the 
Comptroller,  deposits  of  other  banks  as  follows: 

Due  to  other  national  banks,  $259,255,782 

Due  to  state  and  private  banks  and  bankers,      79,072,395 
Due  to  trust  companies  and  savings-banks,   126,985,691 

$465,313,868 

On  the  same  date  their  holding  of  specie  and  legals 
amounted  to  $218,786,132.  It  is  certain  that  a  large 
proportion  of  the  $465,313,868  of  balances  consisted  of 
reserve  money  placed  by  the  owners  to  be  available 
against  an  emergency  or  evil  day.  It  should  be  remem- 
bered that  the  amount  merely  represents  the  balances  be- 
longing to  other  banking  institutions  which  the  national 
banks  of  New  York  City  held  on  August  22d. 

EFFECTS  OF  THE  WITHDRAWALS 

Outside  of  the  national  banks  are  some  large  trust  com- 
panies, state  and  private  banks,  each  of  which  all  the 
time  carries  heavy  deposits  belonging  to  the  interior  banks. 
But  we  may  confine  our  attention  to  the  national  banks. 
It  was  remarked,  a  short  distance  back,  that  the  interior 
bankers  were  manifesting  a  strong  disposition  to  get  their 
reserve  money  out  of  New  York  and  into  their  own  vaults 
at  home.  It  was  well  known  in  New  York  that  many  of 
these  banks  would  withdraw  every  dollar  of  their  bal- 
ances if  they  were  allowed  to  do  so.  If,  on  the  whole,  the 
interior  bankers  withdrew  in  cash  from  the  New  York  City 


THE    PANICS 

national  banks  only  one-third  of  what  they  had  the  right 
to  withdraw  it  would  exhaust  all  the  cash  holdings  of  the 
New  York  bankers  except  some  $66,000,000.  If  they  set 
out  to  withdraw  one-half  their  balances  they  would  have 
exhausted  the  whole  cash  holdings  before  they  accom- 
plished their  purpose,  and  would  have  left  nothing  at  all 
in  cash  for  the  individual  depositors  of  these  same  New 
York  national  banks,  whose  claims  amounted  on  August 
22d  to  $532,636,606.  This  makes  it  plain  that  had  the 
demands  of  the  interior  bankers  been  complied  with  in 
full  the  available  cash  strength  of  the  city  would  have 
been  drawn  away  to  the  country  or  to  the  interior  when 
it  was  urgently  needed  at  the  centre.  In  other  words, 
it  was  as  if  some  human  body  were  desperately  resisting 
the  onset  of  a  terrible  disease.  At  the  approach  of  the 
crisis,  at  the  very  moment  when  the  heart  required  its 
full  supply  of  nourishment,  it  was  attempted  to  draw  the 
life  blood  to  the  extremities. 

The  metropolitan  bankers  declare  that  the  only  means 
of  stopping  this  huge  drain  was  suspension  of  cash  pay- 
ments; whereunder  the  New  York  City  banks  refused  to 
surrender  the  property  of  their  banking  and  individual 
customers  in  the  manner  demanded,  which  was  the  man- 
ner required  by  law.  Partly  to  save  New  York's  face, 
and  partly  to  prevent  other  difficulties  and  trouble,  the 
order  to  suspend  cash  payments  was  sent  to  all  the 
smaller  financial  centres.  A  large  majority  of  them 
obeyed  the  order. 

PANIC  OP  THE  COUNTRY  BANKERS 

While  the  panic  was  in  progress  many  of  the  country 
banks  made  frantic  efforts  to  increase  their  reserves  of 
cash  in  vault.  These  efforts  were  highly  successful  in 
quite  a  number  of  cases.  Thus  a  bank  in  Indianapolis 
advertised  that  it  had  got  its  reserve  up  to  about  60  per 
cent,  of  its  liabilities,  several  in  other  places  were  above 


A    RATIONAL    BANKING    SYSTEM 

50  per  cent.,  and  those  which  got  above  30  and  40  per 
cent,  were  quite  numerous.  The  point  to  be  remem- 
bered is  that  at  none  of  the  points  where  these  banks 
were  located  was  there  any  run  of  depositors  or  alarm  of 
any  consequence.  The  piling  up  of  cash  was  purely  pre- 
cautionary; each  banker  who  undertook  the  task  did  so 
in  order  that  he  might  feel  safe  and  be  prepared  for  a 
run  if  one  developed. 

Another  thing  to  be  noted  and  remembered  is  that 
many  of  the  country  bankers,  in  their  haste  to  build  up 
their  cash  holdings,  were  not  satisfied  merely  to  withdraw 
their  balances  from  the  central  cities.  Their  course  in 
doing  that  was  destructive  enough.  It  is  understood  that 
it  forced  the  suspension  of  payments.  The  other  meas- 
ures they  took  were  scarcely  less  destructive.  They  pro- 
ceeded in  a  great  number  of  cases  to  exact  payment  of  all 
discounted  paper  as  it  matured,  and  refused  to  grant 
renewals  or  new  loans.  This  is  the  thing  that  overthrew 
industry  and  trade,  that  forced  worthy  and  solvent  firms 
into  bankruptcy,  threw  workingmen  by  thousands  out  of 
employment,  and  destroyed  millions  of  dollars  of  the 
hard-earned  profits  of  business  men  of  all  kinds. 

TROUBLES  OF  THE  WESTINGHOUSE  COMPANY 

Everybody  who  follows  financial  happenings  in  the 
United  States  closely  is  familiar  with  the  fate  of  the  pros- 
perous Westinghouse  Company.  It  was  doing  a  good 
business  at  the  time  of  the  panic,  but  it  had  outstanding 
an  amount  of  short-date  paper  which  was  held  in  small 
lots  by  a  considerable  number  of  banks  in  different  parts 
of  the  country.  When  the  panic  came  these  banks  in 
almost  every  case  demanded  instant  payment  of  the 
notes  as  they  matured.  As  it  was  impossible  during  so 
troubled  a  time  to  negotiate  new  loans  to  take  up  the  old 
notes,  the  Westinghouse  people  were  thrown  into  bank- 
ruptcy. It  is  commonly  said  that  their  floating  debt  was 

52 


THE    PANICS 

the  cause  of  their  failure.  It  would  be  fairer  and  more 
correct  to  say  that  they  were  the  victims  of  an  antiquated 
and  inefficient  banking  system.  It  is  not  at  all  improper, 
and  in  countries  other  than  the  United  States  it  is  not  un- 
duly dangerous,  for  a  great  manufacturing  concern  such  as 
the  Westinghouse  Company  to  have  a  reasonable  amount 
of  floating  debt.  Apparently  the  Westinghouse  floating 
debt  was  not  unreasonably  large.  Had  it  been  all  held 
by  one  or  two  strong  branch  banks,  instead  of  being  held 
by  dozens  of  small  bankers  who  had  no  interest  in  the 
company's  well-being  except  in  regard  to  the  $10,000  or 
$25,000  worth  of  notes  which  they  held,  the  company  ' 
probably  would  not  have  been  embarrassed  by  the  New 
York  panic — for  their  bankers  would  have  recognized  it 
as  a  duty  to  carry  them  along;  and,  even  if  the  company 
were  in  fact  insolvent,  the  bankers  might  very  likely  have 
carried  it  till  the  excitement  and  panic  had  subsided. 

The  Westinghouse  case  is  typical  of  many  others. 
Manufacturers  large  and  small,  who  depended  upon 
credits  got  through  the  note  brokers  from  scores  of  little 
banks  which  operated  far  from  the  localities  in  which  the 
factories  were  situated,  were  forced  to  curtail  their  opera- 
tions, and  were  considerably  embarrassed  as  a  result  of 
the  attitude  of  the  interior  bankers  who  pursued  the 
policy  just  referred  to.  Some  of  them  were,  like  the 
Westinghouse  Company,  forced  into  insolvency,  when  if 
they  had  been  able  to  get  the  banking  support  to  which 
their  financial  position  and  their  worthiness  entitled  them, 
and  which  the  banks  in  other  countries  accord  to  their 
customers  in  panics  as  well  as  in  ordinary  times,  they 
would  not  have  been  seriously  troubled. 

INTERIOR  BANKERS  NOT  ALTOGETHER  TO  BLAME 

During  the  last  two  months  of  1907,  and  in  the  early 
part  of  1908,  the  interior  bankers  were  lectured  rather 
severely  for  their  hoarding  propensities.  It  was  ex- 

53 


A    RATIONAL    BANKING    SYSTEM 

plained  to  them  that  their  conduct  was  unpatriotic,  and 
they  were  told  that  it  was  their  duty  to  put  their  cash 
into  circulation  rather  than  to  store  it  in  their  vaults. 
But  when  all  the  circumstances  are  considered  it  will  be 
seen  that  much  unmerited  blame  was  then  laid  upon  the 
bankers  of  the  interior.  The  country  banker  is  not  at  all 
to  be  blamed  if  he  takes  instant  action  to  recall  his  New 
York  balance  in  the  shape  of  cash  when  he  anticipates 
that  an  embargo  is  about  to  be  laid  upon  it.  It  is  all 
very  well  to  talk  to  him  about  the  duty  of  the  banks  to 
stand  shoulder  to  shoulder  and  to  support  each  other, 
but  he  knows  well  enough  that  when  it  comes  to  meeting 
a  demand  of  his  depositors  for  cash  he  will  have  to  stand 
on  his  own  legs.  No,  the  censure  for  the  hoarding  of  cash 
by  the  interior  banks  should  not  be  laid  upon  the  interior 
bankers.  It  belongs  by  right  to  the  system  of  banking. 

CARRYING  CASH  RESERVES  IN  NEW  YORK  CITY 

No  matter  what  system  of  banking  exists  in  the  United 
States  it  will  always  happen  that  each  individual  banking 
office  will  be  called  upon,  in  the  ordinary  course  of  its 
business  from  day  to  day,  to  meet  a  certain  proportion 
of  the  withdrawals  by  its  depositors  through  providing 
drafts  or  orders  upon  New  York,  Chicago,  St.  Louis,  or 
another  centre.  It  will  be  required,  also,  to  provide 
the  proceeds  of  a  large  proportion  of  the  loans  and  dis- 
counts, put  through  for  its  borrowing  customers,  in  the 
shape  of  drafts  upon  these  same  centres.  This  is  so  be- 
cause the  bank's  customers,  depositing  and  borrowing, 
have  to  make  a  large  share  of  their  payments  in  those 
centres.  Therefore,  as  the  demands  upon  the  bank's 
resources  converge  largely  upon  New  York,  it  is  more 
or  less  essential  that  it  shall  carry  a  large  proportion 
of  its  cash  reserve  in  that  city.  But — and  here  is  the 
weakness  of  the  existing  banking  system  in  this  respect 
of  reserves — it  cannot  have  its  reserve  in  New  York  City  j 

54 


THE    PANICS 

and  at  the  same  time  retain  possession  of  the  cash  itself. 
In  order  to  enjoy  the  advantage  of  having  its  reserve  at 
the  desired  strategic  point,  it  must  surrender  the  cash  to 
other  hands,  and  rest  content  with  an  undertaking  by 
another  bank  to  return  the  funds  as  demanded.  This 
difficulty  will  never  be  obviated  as  long  as  each  bank  has 
but  the  single  office.  It  vanishes  entirely  with  the  intro- 
duction of  the  branch  system  and  the  establishment  by 
each  important  bank  of  a  branch  or  agency  in  New  York 
City.  Then  the  reserve  may  be  kept  at  the  centre  where 
converge  the  demands  upon  it,  and  it  may  at  the  same 
time  remain  in  the  possession  of  the  bank  that  owns  it. 
There  need  be  no  haste  to  withdraw  it  to  the  country 
places  where  there  is  no  run  or  no  great  immediate  danger. 
The  country  branches  may  rest  easy  with  the  knowledge 
that  their  cash  reserve  is  in  New  York  in  the  vaults  of 
their  own  bank  under  the  charge  of  their  own  officers. 

How  BRANCH  BANKS  WOULD  HANDLE  A  PANIC 

To  make  this  picture  more  complete  and  the  contrast 
more  striking  it  will  be  well  to  describe  how  a  system  of 
good  branch  banks  would  deal  with  a  panic.  Perhaps  I 
shall  be  forgiven  if  I  refer  to  Canada  again  and  relate  how 
the  branch  banks  there  actually  did  deal  with  the  1907 
panic. 

There  were  eminent  bankers  in  New  York,  Chicago,  and 
other  American  cities  who  early  in  1907  endeavored  earn- 
estly to  induce  the  general  body  of  bankers  throughout 
the  United  States  to  prepare  for  a  storm.  Owing  to  their 
advantageous  viewpoint,  their  experience,  and  their 
knowledge  of  banking,  they  clearly  foresaw  that  a  crisis 
was  on  the  way,  though  they  could  not,  of  course,  know 
when  it  would  materialize.  They  accordingly  put  their 
own  houses  in  order  and  did  what  they  could  to  get  their 
neighbors  to  do  likewise.  However,  they  had  no  au- 
thority over  the  thousands  of  other  bankers  who  saw 

55 


A    RATIONAL    BANKING    SYSTEM 

nothing  but  the  sun  of  prosperity  and  who  were  intent 
upon  making  the  last  dollar  of  profit  while  the  high  in- 
terest rates  continued. 

POLICY  OF  THE  CANADIAN  BANKERS 

Now  the  experienced  professionals  who  had  charge  of 
the  important  Canadian  banks  were  not  behind  the  great 
bankers  of  the  United  States  in  diagnosing  the  situation 
as  dangerous.  They,  too,  saw  that  exceedingly  dirty 
weather  was  ahead.  They  were,  however,  situated  much 
more  fortunately  for  dealing  with  the  matter  than  were 
their  brethern  in  New  York  and  Chicago.  The  latter 
could  only  make  guarded  statements  and  issue  guarded 
warnings,  which,  as  a  matter  of  fact,  were  not  heeded  by 
a  large  number  of  bankers.  But  the  Canadian  bankers 
had  the  power  to  impose  their  will  upon  all  the  banking 
offices  in  the  Dominion.  For  nearly  a  year  before  the 
panic  developed  business  men  and  firms  asking  for  largely 
increased  credits  were  told  that  they  must  keep  their  lines 
down  and  go  slowly.  A  great  many  were  thus  prevented 
from  spreading  heavy  additional  sail  at  a  dangerous  time. 
Then,  four  full  months  before  the  panic  broke,  a  quiet 
but  effective  movement  of  liquidation  of  discounts  was 
instituted.  In  July,  August,  and  September,  notwith- 
standing that  those  months  ordinarily  witness  an  im- 
portant expansion  of  domestic  loans,  the  mercantile  dis- 
counts were  cut  down.  As  may  be  supposed,  this  policy 
of  repression  and  liquidation  brought  the  bankers  much 
unpopularity.  Loud  were  the  complaints  and  accusa- 
tions that  were  levelled  against  them.  They  were  told 
that  they  were  retarding  the  development  of  their  own 
country.  People  pointed  to  the  call  loans  in  New  York 
(part  of  their  reserve  money)  and  declared  that  the 
Canadian  banks  were  starving  Canadian  enterprise  in 
order  to  lend  money  to  Wall  Street  speculators.  Before 
many  months  had  passed  those  merchants  and  others 

56 


THE    PANICS 

who  had  resented  most  bitterly  the  enforced  curtailment 
had  reason  to  be  thankful  that  they  had  been  held  in 
check.  When  the  panic  burst  and  their  outside  creditors 
began  to  press  them  hard  for  settlements,  and  when  it  was 
difficult  to  buy  goods  abroad  except  for  cash,  they  had 
to  acknowledge  that  they  were  fortunate  in  having  their 
bank  lines  well  in  hand  and  their  debts  moderate  in 
amount. 

ADVANTAGES  OP  CONCENTRATION  OF  CONTROL 

It  was  not  so  easy  then  as  it  now  is  to  see  that  a  policy 
such  as  that  pursued  by  the  Montreal  and  Toronto  bankers 
was  exactly  the  right  preparation  for  the  panic.  It  en- 
sured that  when  the  storm  came  Canada  was  running  un- 
der reduced  sail.  And  to  that  happy  circumstance  is  to 
be  ascribed  the  ease  with  which  she  surmounted  the  crisis. 
It  should  be  quite  clear  that  such  intelligent  and  effective 
preparation  for  a  panic  is  only  possible  where  the  branch 
system  prevails,  for  it  is  only  through  the  exercise  of  their 
control  over  the  branch  managers  that  the  professional 
executives  are  able  to  force  industry  and  trade  into  an 
attitude  of  preparedness. 

Then,  mark  the  advantage  enjoyed  by  the  Montreal 
and  Toronto  bankers  after  the  panic  breaks — when  the 
actual  fighting  begins.  It  has  been  remarked  that  while 
the  attack  centred  at  New  York  City,  the  efforts  at  resist- 
ance made  by  the  New  York  bankers  were  largely  neu- 
tralized, and  they  were  eventually  forced  into  a  suspen- 
sion, by  the  drain  of  cash  to  points  in  the  interior  where 
no  runs  existed,  and  where,  as  it  turned  out  in  the  end, 
the  cash  was  not  needed.  This  drain  the  New  York 
bankers  were  powerless,  legally,  to  prevent.  Very  dif- 
ferent was  the  case  of  their  Canadian  confreres.  The 
available  cash  strength  of  the  respective  banks  (apart 
from  the  balances  and  call  loans  carried  abroad)  was  con- 
centrated at  the  centres — chiefly  at  Montreal,  Toronto, 

57 


A    RATIONAL    BANKING    SYSTEM 

and  Winnipeg.  Suppose  some  scores  or  some  hundreds 
of  the  branch  managers  fell  into  a  panic  and  wired  the 
head  offices  to  send  thousands  or  millions  of  dollars  in 
cash  at  once,  it  would  not  matter  in  the  least,  since  the 
general  managers  would  not  send  their  cash  to  points 
where  it  was  not  needed.  The  panic-stricken  managers 
would  be  told  to  keep  cool  and  to  proceed  with  their 
business  as  usual.  The  cash  resources  under  the  branch 
system  can  be  kept  in  reserve  at  the  strategic  centres,  and 
-  they  thus  preserve  their  force  unimpaired.  The  general 
in  command  has  his  forces  well  in  hand;  he  also  has  full 
intelligence  of  and  a  clear  view  over  the  field  of  war; 
and  he  hurries  support  wherever  it  is  needed.  The  United 
States  position  is  as  if  a  general  had  assembled  a  large 
army  to  meet  an  adversary  of  equal  or  greater  strength, 
but  on  the  eve  of  battle  he  is  required  to  send  away  half 
or  two-thirds  of  his  whole  force,  in  a  hundred  small  de- 
tachments, for  the  purpose  of  garrisoning  a  hundred 
towns  not  threatened  at  all  by  the  enemy.  It  is  not  to 
be  wondered  at  that  he  meets  disaster  in  every  great 
struggle. 

THE  QUESTION  OP  FUTURE  PANICS 

Some  authorities  on  finance  have  been  assuring  the 
public  that  the  panic  of  1907  and  the  events  that  followed 
it  eliminated  the  element  of  danger  from  United  States 
banking.  They  say  that  the  lesson  was  taken  to  heart 
by  the  banking  interests,  that  reforms  have  been  effected, 
and  remedial  legislation  passed,  and  that  henceforth  the 
business  will  be  cleaner  and  sounder  and  no  more  panics 
need  be  feared  for  many  years.  It  would  be  well  if  these 
comfortable  assurances  could  be  relied  upon.  To  govern 
one's  conduct  upon  the  assumption  that  they  are  well 
founded  might  prove  exceedingly  dangerous.  In  the 
last  published  abstract  of  condition  of  national  banks — 
that  for  September  i,  1910 — the  New  York  City  national 

58 


THE    PANICS 

banks  are  given  as  holding  deposits  of  other  banks  as 
follows : 

Other  national  banks,  $315,010,697 

State  banks  and  private  banks  and  bankers,     94,353,403 
Trust  companies  and  savings-banks,  208,692,447 

$618,056,547 

Their  holding  of  specie  and  legals  at  the  same  time  was 
$291,652,553.  Thus  there  has  been,  since  the  pre-panic 
statement  of  August  22,  1907,  an  increase  of  $152,742,679 
in  this  dangerous  liability;  and  the  proportion  of  the  cash 
holding  to  the  total  of  bankers'  deposits  is  about  49  per 
cent.,  as  against  47  per  cent,  in  August,  1907.  There  is  no 
reason  to  suppose  that  when  next  something  happens  to 
scare  them  badly  the  interior  bankers  will  act  differently 
from  the  way  they  acted  in  1907.  Whenever  they  see 
the  situation  in  New  York  getting  palpably  out  of  the 
control  of  the  banking  interests  there  they  will  very 
likely  rush  for  their  balances,  just  as  they  did  in  previous 
panic  years. 

BANK-NOTES  AS  A  MEDIUM  FOR  PAYING  OFF  DEPOSITORS 

It  is  but  fair  to  say  that  since  the  panic  of  1907  Con- 
gress has  enacted  legislation  designed  to  enable  the  banks, 
both  metropolitan  and  interior,  to  cope  more  advantage- 
ously with  the  panics  of  the  future.  In  reciting  the  sev- 
eral advantages  enjoyed  by  the  Canadian  banks,  in  regard 
to  dealing  with  panics,  nothing  was  said  about  one  im- 
portant item.  Wherever  a  panic  of  depositors  occurs 
there  is  urgent  need  of  a  medium,  for  making  payments, 
which  will  be  safe  and  entirely  acceptable  to  the  frightened 
creditors,  and  yet  consist  of  something  other  than  specie 
or  legals.  Such  a  medium  the  Canadian  banks  possess 
in  their  note  issues.  The  notes  of  each  bank  are  covered 
by  what  is  practically  a  mutual  guarantee  of  the  associated 
banks  of  Canada.  As  there  will  be  a  chapter  devoted  ex- 
clusively to  the  matter  of  the  bank  note  issues,  it  will 
5  59 


A    RATIONAL    BANKING    SYSTEM 

not  be  necessary  here  to  dilate  upon  the  features  of  the 
plan  further  than  to  say  that  the  important  banks  con- 
sented to  go  into  that  scheme,  whereby  their  stock- 
holders were  made  liable  for  the  note  issues  of  all  other 
chartered  banks  in  the  Dominion,  because  the  issue  of 
each  bank  was  strictly  limited  to  the  amount  of  its  paid- 
up  capital,  and  because  the  notes  in  every  case  were  to 
be  an  absolute  first  lien  on  the  assets  of  the  bank  issuing 
them.  Afterward  the  Canadian  Bankers'  Association  ob- 
tained the  right  to  inspect  the  circulation  books  of  each 
bank,  as  a  measure  of  protection  for  the  associated  in- 
stitutions against  illegal  over  -  circulation  by  the  several 
.members.  And  finally,  in  1908,  the  Dominion  Parlia- 
Jment  conferred  on  the  banks  the  right  to  issue  an  excess 
I  circulation  during  the  crop-moving  season.  Under  this 
law  each  chartered  bank  may,  between  September  3oth 
and  the  3ist  of  the  following  January,  issue  an  additional 
amount  of  its  own  notes  equal  to  15  per  cent,  of  its  com- 
bined capital  and  surplus.  The  ordinary  issue  (up  to  the 
paid-up  capital)  is  free  of  tax  and  interest;  the  excess 
issue  is  subject  to  a  rate  of  interest  to  be  fixed  by  the 
Minister  of  Finance,  which,  however,  may  not  exceed 
5  per  cent,  per  annum.  Finally  the  Bank  Act  subjects 
the  outstanding  notes  of  an  insolvent  or  suspended  bank 
to  interest  at  5  per  cent,  per  annum,  to  run  from  the  date 
of  suspension  to  the  date  on  which  the  liquidator  or  re- 
ceiver advertises  his  readiness  to  redeem  them.  Owing 
to  these  conditions  and  provisions,  in  every  case  of  failure 
of  a  chartered  bank  in  Canada  since  1890  the  notes  of 
the  insolvent  institution  have  circulated  freely  at  par  in 
equal  credit  with  the  notes  of  the  going  banks  until  the 
liquidator  has  succeeded  in  effecting  their  complete  redemp- 
tion. 

THE  NATIONAL  CURRENCY  ASSOCIATIONS 

Now  it  will  be  understood  that  if  there  were  a  run  of 
depositors  upon  a  Canadian  bank,  the  depositors,  or  at 

60 


THE    PANICS 

any  rate  all  of  them  who  possessed  average  intelligence, 
would  be  quite  willing  to  accept  its  notes  in  lieu  of  their 
deposit  claims.  So,  during  the  early  stages  of  a  run  it 
would  have  a  convenient  means  of  meeting  withdrawals. 
If,  however,  its  circulation  was  nearly  up  to  the  au- 
thorized limit  at  the  time  of  the  commencement  of  the 
run — and  some  of  the  smaller  banks  are  in  that  condition 
through  nearly  the  whole  year — it  would  get  hardly  any 
relief  of  this  kind  from  its  own  rights  of  issue;  but  other 
larger  banks  possessing  an  ample  margin  of  issue  rights 
might  lend  it  assistance  in  the  shape  of  their  notes,  and 
in  that  way  a  run  or  runs  might  be  met  by  expansion  of 
the  general  note  circulation  until  the  issues  of  the  banks 
generally  were  brought  close  to  the  authorized  limits. 

It  is  apparent  that  the  object  of  the  Vreeland  Bill, 
passed  by  Congress  immediately  after  the  1907  panic,  is 
to  provide  for  the  national  banks  of  the  United  States  a 
medium  of  this  nature,  for  use  in  a  panic  or  emergency, 
which  will  economize  specie  and  legals  and  yet  give  the 
alarmed  depositors  something  that  will  be  entirely  ac- 
ceptable to  them.  Briefly  put,  the  legislation  permits  any  • 
number  of  national  banks,  not  less  than  ten,  located  con- 
veniently in  any  city,  state,  or  contiguous  territory,  to 
form  a  national  currency  association.  To  be  eligible  for 
membership  therein  a  bank  must  have  outstanding  not 
less  than  40  per  cent,  of  its  capital  in  United  States  bond- 
secured  circulation,  and  it  must  have  a  surplus  of  not  less 
than  20  per  cent,  of  its  capital.  When  the  association  is 
formed,  each  member  may,  in  an  emergency,  pledge  com- 
mercial paper  with  the  association  and  apply  to  the  board 
of  the  local  association  for  notes.  If  the  securities  are 
satisfactory  the  application  is  forwarded  to  the  Comp- 
troller of  the  Currency,  who  in  turn  transmits  it  to  the 
Secretary  of  the  Treasury,  and  if  the  Secretary  considers 
that  business  conditions  in  that  locality  demand  it,  and 
is  satisfied  with  the  character  and  value  of  the  securities 
deposited,  and  that  the  United  States  has  a  lien  on  the 

61 


A    RATIONAL    BANKING    SYSTEM 

securities  deposited  and  on  the  assets  of  the  banks  com- 
posing the  association  amply  sufficient  for  protection,  he 
may  direct  the  issue  of  the  currency  to  an  amount  in  his 
discretion  not  exceeding  75  per  cent,  of  the  cash  value  of 
the  securities  deposited  by  the  bank  with  the  association. 
The  amount  of  currency  thus  allotted  to  any  bank  must 
not  exceed  the  margin  between  its  outstanding  ordinary 
bond-secured  circulation  and  its  combined  capital  and 
surplus;  that  is  to  say,  the  ordinary  bond-secured  circu- 
lation plus  the  emergency  circulation  may  not  exceed  the 
capital  plus  surplus. 

EMERGENCY  NOTE  ISSUES  AGAINST  DEPOSITS  OF  BONDS 

Or,  if  it  does  not  wish  to  join  a  currency  association, 
the  bank  may  deposit  state,  city,  town,  or  county  bonds, 
and  apply  for  notes  up  to  90  per  cent,  of  the  value  of  the 
bonds,  but  not  more  than  the  par  value  of  the  bonds.  In 
this  case  the  bonds  are  to  be  deposited  with  the  Treasurer 
or  any  Assistant  Treasurer  of  the  United  States,  and  ap- 
plication is  to  be  made  to  the  Comptroller  of  the  Currency. 

With  the  object  of  ensuring  the  prompt  retirement  of 
the  notes  after  the  emergency  has  passed  it  is  provided 
that  the  emergency  notes  are  to  be  taxed  at  the  rate  of 
5  per  cent,  per  annum  for  the  first  month,  and  afterward 
at  a  rate  rising  i  per  cent,  each  month  until  the  maximum 
of  10  per  cent,  is  reached. 

It  is  possible  that  this  measure  may  furnish  the  means 
whereby  the  New  York  bankers  will  be  enabled  to  meet 
successfully  a  stampede  of  interior  banks  for  their  bal- 
ances. Those  who  designed  it  expect  that  it  will  provide 
a  satisfactory  medium  for  meeting  runs.  At  the  same 
time  the  banks  have  shown  little  inclination  to  form  cur- 
rency associations  in  order  to  have  the  machinery  in  readi- 
ness for  dealing  with  an  emergency.  The  measure  has 
been  criticised  considerably  by  the  banking  interests. 
One  objection  is  that  the  method  by  which  the  emergency 

62 


THE    PANICS 

notes  are  to  become  available  is  complicated,  and  that  the 
applications  must  pass  through  several  hands  before  the 
party  is  reached  who  has  the  power  to  act.  It  is  objected 
again  that  the  tax  is  so  high  as  to  deprive  the  issuing  banks 
of  practically  all  profit  upon  the  notes,  thus  destroying  the 
incentive  to  issue  and  making  it  probable  that  only  those 
banks  which  are  in  desperate  circumstances  will  resort  to 
the  remedy.  Until  the  measure  has  been  tried  out  in 
actual  practice  it  is  impossible  to  estimate  what  its  effects 
will  be.  If  it  fails  to  fulfil  the  expectations  of  its  authors, 
and  the  national  banks  do  not  apply  for  emergency  notes, 
or  if  they  are  slow  in  doing  so,  it  seems  probable  that  an- 
other suspension  of  payments  will  be  seen  the  first  time 
the  interior  bankers  lose  their  heads. 

How  THE  REFORM  WILL  WORK 

Suppose  the  law  does  what  is  expected  of  it,  and  that 
in  the  next  crisis  the  national  banks  have  recourse  to  its 
provisions  in  such  numbers  and  to  such  an  extent  as  to 
avert  a  general  suspension.  That  would  mean  the  crea- 
tion of  a  very  considerable  volume  of  the  emergency 
notes.  They  can  only  be  created  through  pledge  of  the 
assets  of  the  banks  issuing  them.  Suppose  $300,000,000 
were  created.  If  the  security  consisted  entirely  of  com- 
mercial paper  it  would  mean  the  sequestration  of  $400,- 
000,000  of  assets  which  formerly  were  free.  If  the  new 
notes  should  be  used  to  pay  off  depositors  it  would  mean 
that  the  banks  had  temporarily  parted  with  $400,000,000 
of  their  assets  in  order  to  borrow  $300,000,000  with  which 
to  pay  off  their  depositors.  The  position  of  the  remain- 
ing depositors  would  be  weakened  to  that  extent.  This 
borrowed  money  must  be  repaid  before  the  assets  can  be 
regained.  The  repayment  can  be  effected  without  dis- 
tress only  if  the  individual  banks  succeed  in  inducing 
their  depositors  to  redeposit  practically  all  of  the  funds 
withdrawn.  On  the  other  hand,  it  might  happen  that  a 

63 


A    RATIONAL    BANKING    SYSTEM 

considerable  number  of  banks  would  apply  for  emergency 
notes  with  the  object  of  paying  off  debts  due  by  them  to 
other  banks;  some  might  do  so  with  the  object  of  getting 
funds  to  make  new  loans  to  their  customers,  or  to  protect 
deals  or  speculations  of  their  own  officers  or  directors.  To 
the  extent  that  this  was  done  it  would  mean  that  securities 
formerly  held  generally  against  the  deposits  and  liabili- 
ties were  placed  beyond  the  reach  of  the  ordinary  creditors. 
It  should  be  remembered,  too,  that  the  assets  pledged, 
whether  bonds  or  commercial  paper,  would  be,  in  all  prob- 
ability, the  best  in  the  portfolios. 

PAYMENT   IN   THE    BANK'S    OWN    NOTES    GIVES    ONLY 
TEMPORARY  RELIEF 

It  is  to  be  remarked  that  the  same  objection  applies 
to  the  use  by  the  Canadian  banks  of  an  expansion  of  their 
note  issues  to  meet  runs  of  depositors.  In  Canada's  case, 
supposing  the  bank  which  is  run  upon  goes  down  after 
expanding  its  issues  to  the  limit,  it  means  that  a  few  of 
its  depositors  who  were  fortunate  enough  to  convert  their 
balances  into  bank  notes  escape  without  loss.  But  their 
success  makes  the  remainder  of  the  depositors  worse  off, 
sine  3  it  has  created  a  larger  amount  of  preferred  claims 
which  must  be  liquidated  before  the  ordinary  creditors 
may  participate  in  the  estate.  It  is  also  to  be  borne  in 
mind  that  the  Canadian  bank,  which  during  a  run  pays 
by  means  of  its  own  notes,  does  not  thereby  conserve  its 
specie  and  legals  except  for  one  or  two  days;  for  the  de- 
positor will  at  once  pay  the  notes  into  one  or  other  of 
the  stronger  banks,  and  the  beleaguered  institution  will 
receive  them  back  promptly,  along  with  other  of  its 
obligations,  through  the  clearing-house;  and  it  will  be 
called  upon  to  redeem  them  with  legals  forthwith. 

BANKS  SHOULD  SUPPORT  THEIR  CUSTOMERS  IN  A  PANIC 

Possibly   the   foregoing   descriptions   and   illustrations 

will  have  served  to  explain  what  a  vast  difference  there 

64 


THE    PANICS 

would  be  in  the  handling  of  panics  in  the  United  States 
if  the  banking  system  of  the  country  consisted  altogether, 
or  nearly  altogether,  of  large  and  strong  branch  banks. 
In  the  first  place,  it  would  be  possible  to  do  something 
worth  while  in  the  way  of  preparing  to  meet  the  panic. 
With  experienced  professionals  in  charge,  and  endowed 
with  the  authority  requisite  for  compelling  obedience  to 
their  orders,  the  ship  of  finance  could  be  gotten  into  trim 
for  encountering  a  tempest  some  little  while  before  the 
wind  and  waves  burst  upon  it.  The  mercantile  and 
manufacturing  interests  which  depended  on  bank  loans 
for  carrying  along  their  operations  might  be  held  in  re- 
straint for  a  while  before  the  panic  developed;  and  after 
it  broke  they  would  be  supported  and  carried.  The  cash 
resources  would  not  be  sent  to  lie  idly  in  vaults  at  Indian- 
apolis or  Salt  Lake  City  when  New  York  was  the  place 
where  they  were  needed.  The  country  bankers  would  not 
be  so  apt  to  lose  their  heads;  for  one  reason,  because  they 
would  be  all  trained  men,  and,  for  another,  because  the 
responsibility  of  maintaining  the  solvency  of  the  banking 
offices  under  their  charge  would  lie  not  upon  them  but 
upon  the  executives  at  the  head  offices.  There  would  be 
a  more  general  knowledge  among  the  whole  fraternity  of 
the  fact  that  the  surest  way  for  a  bank  to  hold  the  con- 
fidence of  its  depositors  during  a  panic  is  for  it  to  con- 
tinue making  advances  to  its  customers.  Wherever  bank- 
ing is  regarded  as  a  science  it  has  long  been  understood 
that  a  policy  of  frantically  calling  in  loans,  refusing  re- 
newals of  matured  paper,  and  refusing  to  extend  the 
customary  support  to  regular  borrowers  is  exactly  the 
policy  calculated  to  start  a  run  of  depositors. 


IV 

THE   CLERKS  AND  OFFICERS 
CONDITIONS  OF  SERVICE 

IT  will  be  advisable  now  to  refer  to  the  conditions  of 
service.  When  the  merits  and  demerits  of  a  par- 
ticular system  of  banking  are  under  discussion  it  is  im- 
portant to  have  a  satisfactory  knowledge  of  what  it  does 
for  its  devotees.  How  do  the  men  fare  ?  Those  devoting 
their  lives  to  the  service  of  the  local  independent  banks  of 
the  United  States — are  they  better  or  worse  off  than  their 
fellows  serving  under  different  systems  in  other  countries  ? 
Are  the  rewards  for  faithful  and  intelligent  work  large 
enough  and  sure  enough  to  attract  the  best  men  into  the 
business?  Or  is  the  banking  service  studiously  avoided 
by  intelligent  youths  able  to  choose  their  means  of  earn- 
ing a  livelihood  and  not  bound  by  family  or  other  ties  to 
certain  avocations? 

By  getting  answers  to  these  questions  one  may  learn 
a  great  deal  as  to  whether  the  usefulness  of  the  banks 
could  be  increased.  It  will  be  clear  to  every  intelligent 
mind  that  a  system  under  which  the  men  are  hopeful, 
keen,  and  zealous  will  in  its  daily  working,  other  things 
being  equal,  forward  the  country's  commerce  and  industry 
immeasurably  better  than  another  which  provides  only  a 
monotonous  and  dreary  future  for  the  employees  to  gaze 
into. 

A  FORECAST  OF  BRANCH  BANKS 

Immediately  after  the  panic  of  1907,  when  the  banking 
breakdown  caused  a  large  number  of  the  experts  to  in- 

66 


THE    CLERKS    AND    OFFICERS 

terest  themselves  in  the  question  of  the  desirability  of  in- 
stituting branch  banks  in  the  United  States,  an  ardent 
supporter  of  the  existing  system  argued  that  bank  em- 
ployees should  fight  tooth  and  nail  against  the  branch  idea 
because  its  adoption  would  be  detrimental  to  their 
interests. 

"If  the  large  number  of  interior  banks  now  working 
independently  were  converted  into  branches  of  great  in- 
stitutions having  head  offices  in  New  York,  Chicago,  or 
some  other  centre,  and  were  under  the  management  of 
far-away  executives  intent  upon  economical  administra- 
tion and  operation,"  so  ran  the  argument,  "thousands  of 
men  would  be  dismissed  in  every  part  of  the  country; 
and  so  the  profits  of  the  stockholders  would  be  built  up 
through  taking  the  bread  from  the  mouths  of  an  army 
of  bank  men." 

AN  ECONOMIC  REVOLUTION 

Even  if  this  forecast  of  what  would  happen  to  the  em- 
ployees were  correct,  it  could  yet  be  made  into  a  powerful 
argument  not  against  branch  banks  but  for  them.  It  im- 
plies that  the  banking  business  at  present  is  wastefully 
conducted  in  that  it  is  supporting  a  host  of  unnecessary 
officers  and  men.  Waste  of  this  kind  constitutes  a  tax 
reaching  in  some  way  citizens  of  almost  every  class. 
Waste  in  banking  tends  to  increase  the  rates  of  discount 
which  commercial  and  other  borrowers  must  pay,  to  re- 
strict the  amount  of  credits  available  for  their  use,  and  to 
decrease  the  interest  rate  on  deposits,  while  at  the  same 
time  making  the  depositors'  position  less  secure.  Though 
an  economic  revolution,  wherein  a  mass  of  labor  is  dis- 
placed through  the  introduction  of  improved  machinery, 
commonly  causes  temporary  hardship,  it  is  considered 
that  the  benefit  accruing  to  the  whole  public  through  the 
cheapening  of  a  much-used  article  outweighs  the  injury 
done  to  the  particular  class.  In  America  especially  is 
this  doctrine  recognized,  and  it  is  commonly  understood 

67 


A    RATIONAL    BANKING    SYSTEM 

that  much  of  the  progress  of  the  nineteenth  and  twentieth 
centuries  has  been  achieved  in  this  way.  The  mistake 
made  by  those  who  use  such  an  argument  against  branch 
banks  is  in  assuming  that  the  bank  stockholders  would 
get  all  the  benefit  of  the  economies.  Experience  teaches 
that  although  those  owners  or  proprietors  who  first  intro- 
duce labor-saving  machinery  often  benefit  considerably  in 
their  profits,  in  the  long  run  competition  ensures  that  a 
large  share  of  the  gain  will  go  to  the  consuming  classes. 

Thus  it  can  be  seen  that  if  the  institution  of  branch 
banks  resulted  in  some  thousands  of  unnecessary  bank 
employees  losing  their  places,  a  substantial  compensation 
would  very  likely  accrue,  in  the  end,  to  the  people  in 
general  as  a  result  of  the  change.  In  other  words,  it 
might  be  expected  to  represent,  according  to  this  theory, 
the  sacrifice  of  a  certain  class,  not  very  strong  in  numbers, 
to  the  general  good. 

But  what  if  it  should  develop  that  the  economies  and 
benefits  of  branch  banking  could  be  given  to  the  people 
of  the  United  States  without  inflicting  any  hardships  at 
all  on  the  bank  employee?  What  if  the  innovation,  in- 
stead of  injuring  him,  should  result  in  a  decided  bettering 
of  his  circumstances?  What  if  it  opened  for  him  an  at- 
tractive prospect  of  which  at  present  he  knows  nothing 
at  all?  If  it  can  be  shown  that  branch  banks  would  so 
affect  the  rank  and  file  of  bank  men  the  illustration  should 
constitute  a  potent  argument  for  their  introduction.  Let 
us  therefore  now  inquire  into  the  conditions  of  service 
presently  prevailing  under  the  existing  system  of  local 
banks. 

SERVICE  IN  WALL  STREET  BANKS 

It  is  well  understood  that  the  best  prizes  which  bank- 
ing has  to  offer  lie  in  the  great  cities.  New  York  itself, 
being  the  financial  heart  of  the  nation,  has  in  its  gift  the 
most  valuable  of  them  all.  To  win  the  place  of  president 
or  vice-president  of  a  great  metropolitan  bank  is  a  high 

68 


THE    CLERKS    AND    OFFICERS 

and  enviable  achievement.  Some  of  the  men  now  holding 
those  positions  worked  up  to  them  without  extraneous 
aid,  by  sheer  ability  and  industry.  Theoretically  the 
achievement  may  be  performed  by  any  person  entering 
the  service.  But  in  practice,  under  the  present  system, 
a  large  number  of  the  really  good  men,  perhaps  the  ma- 
jority of  them,  have  no  hope  whatever  of  rising  to  the 
high  places.  Take  a  large  Wall  Street  bank  employing 
two  hundred  or  three  hundred  men.  At  the  top  are  per- 
haps a  dozen  places  carrying  very  large  salaries.  The 
incumbents  of  those  positions  hold  them  indefinitely  year 
after  year.  Nothing  except  the  death  or  resignation  of 
some  one  higher  up  provides  the  opportunity  for  pro- 
motion. Down  through  the  various  grades  and  depart- 
ments the  same  condition  prevails  to  a  greater  or  less 
extent.  It  may  be  said  that  there  is  no  satisfactory  cir- 
culation of  the  men.  In  some  banks  there  is  a  system 
whereby  the  men  are  shifted  from  one  post  to  another  as 
a  guard  against  fraud,  but  a  movement  of  that  kind  is 
not  at  all  to  be  compared  with  the  rapid,  irresistible  move- 
ment by  which  the  best  men  in  the  Canadian  branch 
banks  find  themselves  placed,  after  service  for  a  certain 
number  of  years,  in  high  and  commanding  positions.  In 
a  great  New  York  bank  three  or  four,  or  perhaps  half  a 
dozen,  out  of  every  hundred  employees  may  hope  to  rise 
to  positions  of  real  importance.  The  rest  have  scarcely 
any  chance.  One  way  there  is  in  which  a  moderately 
rapid  promotion  might  be  ensured.  The  policy  might 
be  followed  of  casting  aside  the  men  who  arrive  at  or 
pass  middle  age  without  rising  above  the  purely  clerical 
work.  However,  not  many  bankers  could  bring  themselves 
to  employ  so  hard-hearted  a  plan  of  improving  the  tone  of 
their  offices. 

A  DREARY  OUTLOOK 

Thus  it  happens  that  all  that  the  bulk  of  the  employees 
can  look  forward  to  is  steady  employment  at  salaries 


A    RATIONAL    BANKING    SYSTEM 

which  may  rise  slowly  or  not  at  all.  Day  after  day,  year 
after  year,  they  answer  the  roll-call,  growing  old  and 
gray-headed,  always  at  the  same  work.  As  for  the  few 
who  do  climb  high  their  progress  is  impeded  because  of 
the  places  found  and  promotions  fixed  for  relatives  and 
protege's  of  the  highest  officers  and  the  directors.  It 
must  be  conceded  that  such  an  outlook  as  this  is  exceed- 
ingly dreary,  not  at  all  calculated  to  inspire  enthusiastic 
service  or  to  draw  the  best  material  into  the  service  of 
the  banks. 

Such  are  some  of  the  conditions  in  the  largest  cities 
where  the  best  opportunities  are  to  be  met.  As  may  be 
supposed,  conditions  in  the  smaller  places  in  some  re- 
spects are  worse.  In  them,  practically  everywhere,  there 
is  a  positive  block  at  the  teller's  post.  Beyond  it  one  may 
not  hope  to  rise  for  years  and  years,  except  by  a  lucky 
chance.  Above  the  teller  are  ranked  the  cashier,  vice- 
president,  and  president.  Twenty  years  may  pass  with- 
out a  single  change  occurring  in  those  offices.  True,  the 
business  may  grow,  more  clerks  may  be  taken  on  and  put 
beneath  one,  so  to  speak,  and  the  salary  may  go  slowly 
up,  but  the  high  positions  are  not  thereby  brought  nearer. 
There  is  sadness  as  well  as  humor  in  the  popular  saying 
that  the  bank  clerk  in  the  country  town  passes  the  most 
of  his  life  looking  out  of  the  same  window  at  the  same 
town  pump. 

CONDITIONS  OF  SERVICE  IN  CANADA 

In  the  Dominion  men  are  not  hired,  as  a  rule,  to  fill 
any  post  that  happens  to  become  vacant.  Nearly  all 
the  employees  are  taken  on  as  juniors,  preferably  at  the 
age  of  seventeen  or  thereabouts,  with  salary  of  two  hun- 
dred or  two  hundred  and  fifty  dollars  a  year.  When  a 
new  and  responsible  position  is  created,  such  as  by  open- 
ing a  new  branch,  or  when  a  vacancy  occurs  in  an  exist- 
ing position,  likely  as  not  a  whole  line  of  promotions 

70 


THE    CLERKS    AND    OFFICERS 

affecting  even  the  junior  clerks  will  take  place.  As  for 
the  junior,  the  bank  does  not  hire  him  with  the  design 
merely  of  developing  him  into  a  good  clerk;  its  real  ob- 
ject is  to  make  an  expert  banker  out  of  him,  to  develop 
his  judgment  and  his  knowledge  of  banking  principles  to 
such  an  extent  that  he  can  be  trusted  to  take  charge  of 
the  bank's  affairs  at  important  branches,  and  as  its 
representative  to  deal  with  the  leading  business  men  and 
depositors,  to  dispense  credits  and  gather  them  in  again, 
to  act,  in  short,  as  responsible  agent  for  administering 
a  fund  which  might  amount  to  several  millions  of  dollars. 
In  every  junior  taken  on  its  staff  the  bank  hopes  to  find 
material  that  will  develop  into  a  servant  of  this  kind. 
Its  system  of  training  is  shaped  with  the  object  of  dis- 
covering and  encouraging  every  man  who  has  promise  or 
ability. 

EVERY  MAN  HAS  His  CHANCE 

At  the  annual  salary  revisions  the  young  banker  may 
expect,  in  regular  course,  increases  of  one  hundred  dol- 
lars per  year.  In  addition  he  may  get  special  increases 
for  specially  good  work,  or  to  accompany  his  promotion 
to  a  higher  post.  He  will  proceed  after  this  manner  until 
he  is  in  the  neighborhood  of  eight  hundred  or  nine  hun- 
dred a  year,  when  he  reaches  what  may  be  regarded  as 
the  crisis  of  his  career.  It  may  take  seven  years  or  more 
to  demonstrate  whether  he  is  available  for  the  more  re- 
sponsible posts,  or  whether  he  is  fit  for  nothing  but 
clerical  work.  So  great  is  the  pressure  for  men  to  fill 
positions  as  managers  and  accountants  of  new  branches 
that  the  executives  will  often  give  the  proved  incapables 
another  chance,  in  the  hope  that  they  will  make  good; 
and  it  is  with  the  greatest  reluctance  that  they  are  aban- 
doned to  their  permanent  clerkships.  Even  when  they 
are  so  abandoned  they  doubtless  will  get,  if  their  conduct 
is  good,  increases  of  fifty  dollars,  or  perhaps  a  hundred, 
at  uncertain  intervals. 


A    RATIONAL    BANKING    SYSTEM 


OPENINGS  FOR  MEN  WITH  ABILITY 

But,  as  regards  the  young  banker  of  eight  or  ten  years' 
service  who  has  demonstrated  that  he  has  good  average 
ability,  it  may  be  said  that  he  is  just  on  the  threshold  of 
his  real  advancement.  Before  he  is  thirty  he  may  get  an 
appointment  as  manager  of  a  new  branch,  and  then  his 
future  is  just  what  he  makes  it.  A  great  many  of  the 
new  branches  are  established  in  small  Western  towns 
where  the  business  grows  rapidly.  An  office  may  start 
with  a  manager  and  one  clerk  and  develop  in  a  few  years 
into  an  important  branch  with  six  or  seven  clerks  and 
half  a  million  in  discounts.  If  the  manager  accomplished 
this  without  making  losses  through  bad  debts  he  would 
get  quick  increase  of  salary  and  the  head  office  would 
certainly  have  him  in  mind  when  the  post  of  manager  in 
a  large  city  next  fell  vacant.  It  is  not  at  all  unreasonable 
for  a  junior  to  expect  that  in  fifteen  years  from  the  com- 
mencement of  his  service  he  will  become  manager  of  a 
good  office  and  be  drawing  a  salary  of  from  $2,000  to 
$4,000  a  year.  As  an  example  of  the  prospects  in  the 
banking  service  in  Canada  the  case  of  one  branch  in 
which  I  myself  served  might  be  quoted.  On  my  joining 
the  branch  the  staff  consisted  of  a  manager,  an  accountant, 
and  ten  clerks.  Two  of  the  clerks  resigned — one  to  take 
a  very  good  position  in  an  insurance  office,  the  other  be- 
cause of  dissatisfaction  at  his  progress.  Within  twelve 
years  the  manager  had  gone  on  the  pension  list  and 
every  one  of  the  others  had  become  branch  mana- 
gers at  salaries  ranging  from  $1,200  to  $4,000.  Two, 
who  were  juniors  in  1893,  now  command  the  bank's 
branches  in  two  of  the  most  progressive  of  the  far  West- 
ern cities.  Not  one  of  these  young  men  considers  that 
he  has  reached  his  limit ;  practically  all  of  them  be- 
lieve, and  with  reason,  that  their  progress  has  just  be- 
gun. 

72 


THE    CLERKS    AND    OFFICERS 

PROMOTION  FREE  AND  UNRESTRICTED 

So  far  as  the  figures  of  the  salaries  are  concerned,  it  is, 
of  course,  to  be  borne  in  mind  that  Canada  is  a  poor 
country  as  compared  with  the  United  States;  and  on 
that  ground  alone  one  might  expect  a  smaller  rate  of  pay 
to  prevail  north  of  the  international  boundary.  It 
would  be  easy  to  quote  examples  in  the  Dominion  of  ad- 
vancement more  rapid  than  this.  The  principal  cause  of 
the  quick  promotion  and  rapid  increase  of  salary  has  been 
the  branch  bank  extension  movement.  That  did  not 
attain  great  velocity  until  after  1900.  Therefore,  the 
example  I  have  given  contains  at  least  seven  years  in 
which  conditions  were  not  so  favorable  as  at  present. 

The  point  which  I  wish  to  make  by  means  of  the  illus- 
tration is  that  every  member  of  the  branch  staff  had  the 
opportunity  of  rising  to  a  managership;  all  but  two  of 
them  actually  did  so.  In  the  Canadian  system  there  is  no 
block  anywhere,  neither  at  the  teller's  nor  at  any  other 
post.  Promotion  is  free  and  unrestricted. 

From  these  two  sketches  it  is  possible  to  get  a  fair  idea 
as  to  the  contrast  between  the  two  services — that  of  the  r& 
United  States  and  of  Canada.  As  before  mentioned,  it  is 
not  denied  that  extraordinary  ability  may  win  great 
prizes  in  the  Republic;  but  it  is  contended  that  the 
general  body  of  bank  employees  in  the  United  States  have 
a  poor  chance  as  compared  with  that  possessed  by  all 
Canadian  bank  clerks.  In  the  Dominion  no  gray-headed 
men  are  found  in  subordinate  positions  unless  from  some 
fault  or  shortcoming  of  their  own  or  from  exceptionally 
hard  luck.  In  the  path  of  promotion  there  is  no  barricade 
or  block  from  the  junior's  post  up  to  that  of  the  general 
manager. 

BRANCH-BANK  SERVICE  PROVIDES  A  BETTER  EDUCATION 

Another  thing  to  be  borne  in  mind  is  that  the  condi- 
tions of  the  banking  service  in  Canada  are  such  as  to  give 

73 


A    RATIONAL    BANKING    SYSTEM 

the  employees  a  better  all-round  knowledge  of  banking 
than  is  possessed  by  the  bank  employees  in  the  United 
States.  The  Canadian  bankers  are  all  trained  men,  while 
many  of  the  American  bankers  are  not.  Dr.  Joseph 
French  Johnson,  dean  of  the  School  of  Commerce  and 
Finance  of  New  York  University,  in  an  address  to  the 
Missouri  Bankers'  Association  in  May,  1909,  on  his  return 
from  a  visit  to  Canada,  had  the  following  to  say  regarding 
this  matter  of  the  qualifications  of  the  bankers:  "I  dis- 
covered in  Canada  what  seemed  to  me  to  be  the  beginning 
of  a  profession  for  bankers.  It  ought  to  be  a  profession. 
It  ought  to  rank  with  the  learned  professions.  It  is  as 
much  a  profession  as  law,  medicine,  or  engineering.  We 
don't  find  it  so  much  of  a  profession  in  the  United  States, 
I  am  sorry  to  say,  as  I  found  it  in  Canada.  If  I  wanted 
to  be  a  bank  president  in  the  United  States,  or  if  I  had 
made  up  my  mind  to  be  in  youth,  I  would  not  have  studied 
the  banking  business,  knowing  what  I  do  now.  I  would 
not  have  gone  in  as  a  clerk  in  order  that  I  might  become 
paying  teller,  cashier,  and  vice-president.  I  never  would 
have  gone  through  by  that  route.  No,  I  would  have  gone 
into  business  —  the  manufacturing  business,  wholesale 
business,  any  kind  of  a  business  in  which  I  could  make 
money  and  buy  some  stock  and  elect  myself  bank  presi- 
dent. I  do  not  know  that  you  do  that  way  here  in  Mis- 
souri, but  it  is  done  that  way  a  great  deal  in  the  United 
States.  Nothing  of  the  sort  do  you  find  in  Canada." 

WHY  THE  BRANCH  SYSTEM  Is  MORE  ATTRACTIVE 

It  is  hardly  possible  to  ascribe  the  difference  in  condi- 
tions existing  on  the  two  sides  of  the  boundary  line  to 
anything  else  than  the  difference  in  the  two  systems  of 
banking.  The  service  in  Canada  is  more  attractive  be- 
cause the  branch  system  is  in  vogue  there.  Constant 
additions  of  new  branches  to  the  various  banking  organiza- 
tions results  in  creating  numerous  opportunities  for  pro- 

74 


THE    CLERKS    AND    OFFICERS 

motions.  Besides  the  changes  necessary  to  fill  those  posi- 
tions, the  steady  increase  in  the  number  of  bank  branches 
tends  to  create,  all  the  time,  new  positions  of  importance 
in  the  executive  offices.  As  the  branches  multiply  the 
number  of  officers  engaged  in  supervising  and  controll- 
ing them  must  be  increased,  and  the  positions  of  the  exist- 
ing officers  constituting  the  executive  force  must  get  more 
important. 

But  a  comparison  such  as  the  foregoing  cannot  be  taken 
as  an  entirely  satisfactory  illustration  of  what  American 
bank  clerks  would  gain  from  the  institution  in  the  United 
States  of  branch  banks  of  the  Canadian  type.  Every 
youth  of  really  good  ability  who  enters  the  Canadian 
service  as  a  junior  may  feel  tolerably  sure  that  his  ability 
will  be  discovered,  and  that  he  may,  provided  he  attends 
earnestly  to  his  duties,  governs  his  conduct  properly,  and 
retains  good  health,  rise  to  be  manager  at  some  such  place 
as  Hamilton,  Ottawa,  Winnipeg,  Vancouver,  or  Quebec, 
or  it  may  be  Montreal  or  Toronto.  With  the  same  bank- 
ing system  in  vogue  in  the  United  States,  every  American 
youth  of  real  ability  entering  the  banking  business  and 
giving  the  same  attention  to  his  duties  and  conduct  would 
have  an  equal  opportunity  of  rising  to  the  managership  of 
branches  far  more  important  than  are  to  be  found  in  the 
Canadian  cities. 

THE  SERVICE  OF  A  GREAT  AMERICAN  BRANCH  BANK 

The  dignified,  highly  paid  posts  open  to  him  would  be 
numerous  and  varied.  The  service  of  a  great  American 
bank  with  branches  everywhere  in  the  Union  would  be 
alive  with  brilliant  possibilities  for  ambitious  minds. 
Employed  on  its  staff  there  would  be  no  danger  whatever 
of  being  doomed  to  gaze  for  a  lifetime  at  the  same  town 
pump;  no  danger  of  being  kept  down  because  the  teller, 
the  cashier,  the  president,  and  vice-president  were  more 
or  less  permanent  fixtures.  The  work  would  be  vastly 

6  75 


A    RATIONAL    BANKING    SYSTEM 

more  interesting.  In  twenty  or  twenty-five  years  a  man 
might  see  service  in  half  a  dozen  different  states.  Such 
an  experience  could  hardly  fail  to  broaden  his  mind  and 
increase  his  knowledge  of  his  own  country. 

Another  way  in  which  the  bank  clerk  would  gain 
through  the  general  introduction  of  the  branch  system 
would  be  in  the  improvement  of  his  social  status.  An 
employee  of  a  powerful  bank  possessing  hundreds  of 
millions  in  assets,  carrying  the  accounts  of  great  cor- 
porations and  capitalists,  and  having  branches  scattered 
widely  through  the  country  would  be  a  more  important 
unit  in  the  social  world  than  the  employee  of  the  typical 
single-office  local  bank.  The  prestige  of  the  institution  he 
served  and  the  possibility  of  his  rising  high  in  its  service 
would  cause  society  to  rate  him  better  than  it  now  rates 
bank  clerks  in  general. 

BRANCH  BANKS  WOULD  INCREASE  THE  DEMAND  FOR  MEN 

But  it  is  time  to  deal  with  another  matter.  In  the 
earlier  part  of  this  chapter  notice  was  taken  of  the  argu- 
ment that  thousands  of  bank  men  would  lose  their  places 
if  branch  banks  were  introduced.  Let  us  see  what  would 
likely  happen  in  this  regard.  If  branch  banks  are  ever 
introduced,  the  introduction  will  almost  inevitably  take 
place  through  the  conversion  of  thousands  of  independ- 
ent interior  banks  into  branches  of  larger  institutions. 
Whenever  one  of  these  absorptions  occurred  the  staff  of 
the  acquired  bank  would  be  retained,  because  it  would 
be  in  the  interest  of  the  consolidation  to  retain  the  men. 
In  all  probability  the  cashier  would  become  manager  of 
the  branch.  But  the  presidency,  the  vice-presidency, 
and  the  local  board  would  be  abolished.  So  far  as  the 
clerks  are  concerned  there  is  no  hardship  involved  in 
that.  After  the  branch  movement  got  well  under  way 
it  is  very  certain,  if  the  Canadian  experience  goes  for 
anything,  that  an  active  campaign  of  opening  branches 


THE    CLERKS    AND    OFFICERS 

in  altogether  new  places  would  be  instituted.  Hundreds 
of  places  that  now  have  no  banking  facilities  at  all  would 
be  supplied  with  offices  designed  to  carry  on  the  business 
of  discount  and  deposit.  That  would  come  about  be- 
cause a  branch  with  simply  a  manager  and  one  or  two 
clerks  can  be  operated  at  a  profit  on  a  less  volume  of 
business  than  would  be  necessary  for  an  independent 
bank  with  full  paraphernalia  of  officers  and  board.  For 
the  new  branches  managers  and  accountants  would  be 
wanted.  The  banks  would  find  it  more  advantageous  in 
the  long  run  to  promote  their  own  men  to  the  manager- 
ships than  to  take  in  outsiders  about  whom  they  knew 
little  or  nothing.  Hence  the  practice  of  taking  in  juniors 
and  training  them  would  naturally  be  evolved. 

There  is,  therefore,  every  reason  to  expect  that  the  in- 
stitution of  branch  banks  in  the  United  States  would  be 
followed  in  a  short  while,  if  the  banks  were  of  the  right 
type  and  were  given  reasonable  privileges  and  a  reason- 
able degree  of  freedom,  by  a  remarkable  expansion  in  the 
demand  for  men.  It  would  follow  necessarily  that  salaries 
would  be  moved  generally  above  the  present  level. 

How  THE  OFFICERS  WOULD  FARE 

Next,  let  us  see  how  the  officers  would  fare  upon  the 
introduction  of  branch  banks : 

It  was  remarked  that  on  the  absorption  of  an  inde- 
pendent interior  bank  into  a  branch  institution  the 
offices  of  president,  vice-president,  and  board  of  the  ab- 
sorbed bank  would  be  abolished.  In  actual  practice, 
when  this  occurred,  the  executive  of  the  absorbing  in- 
stitution would  take  pains  to  discover  what  officer  or 
officers  had  conducted  the  active  management  of  the 
absorbed  bank  while  it  had  an  independent  existence. 
It  might  have  been  the  president  that  had  had  the  active 
management;  it  might  have  been  the  vice-president;  or 
it  might  have  been  the  cashier.  Whichever  one  it  was 

77 


A    RATIONAL    BANKING    SYSTEM 

would  be  taken  into  the  service.  If  more  than  one  of  the 
governing  officers  could  properly  lay  claim  to  be  con- 
sidered a  professional  banker,  the  bank  would  doubtless 
desire  to  retain  them.  The  only  officers  for  whom  it 
would  have  little  or  no  use  would  be  those  who  were 
actively  engaged  in  some  other  business  or  calling,  but 
who  exercised  the  right  of  supervision  or  control  over  the 
local  bank's  business  in  the  interests  of  the  stockholders. 
Obviously  the  new  system  would  contain  no  places  for 
them.  Internal  supervision  and  control,  in  the  case  of 
a  branch  bank,  are  exercised  from  the  head  office  by  a 
skilled  professional  assisted  by  a  corps  of  expert  examiners. 

THE  CASHIER'S  OPPORTUNITY  WOULD  BE  ENLARGED 

But  the  position  of  the  cashier,  or  other  officer  who  has 
had  in  his  hands  the  active  management,  becomes  in  some 
important  respects  considerably  improved  when  the  bank 
is  converted  into  a  branch  under  his  management.  Under 
the  system  of  local  banks  he  has  to  operate  the  bank 
subject  to  the  supervision  and  control  of  the  local  di- 
rectors. In  most  cases  they  are  men  engaged  in  some 
outside  business.  Usually  they  are  men  of  substance 
and  influence.  Their  attitude  toward  their  cashier  may 
be  one  thing  or  it  may  be  another.  One  board  may  leave 
its  cashier  practically  untrammelled  in  his  conduct  of  the 
bank's  affairs,  contenting  itself  with  loosely  supervising 
the  loans  and  other  business.  Another  board  may  con- 
tain one  or  more  domineering  characters,  who,  without 
any  real  understanding  of  banking,  insist  upon  constantly 
interfering  in  the  active  management.  They  may  cause 
the  cashier  to  take  paper  of  which  he  disapproves;  and 
they  may  find  fault  with  certain  of  his  advances,  desirable 
and  right  from  the  strictly  banking  point  of  view,  but  to 
which  they  are  averse  because  of  local  prejudice  or 
sectionalism.  There  must  be  in  the  United  States  many 
capable  cashiers  or  managers  who  feel  themselves  thwarted 

78 


THE    CLERKS    AND    OFFICERS 

at  every  turn  by  these  meddling  incapables.  From  all 
that,  absorption  into  the  branch  system  offers  a  com- 
plete and  immediate  deliverance.  Acting  as  a  local  man- 
ager of  a  branch  bank  the  American  country  banker  would 
be  delivered  from  the  domination  of  the  local  magnate. 
His  obedience  is  claimed  instead  by  an  expert  who  knows 
a  great  deal  more  than  he  of  the  business  of  banking. 
This  expert  knows  little  or  nothing  of  the  petty  politics 
of  the  country  town.  He  probably  will  insist  that  the 
bank  be  not  involved  with  any  of  the  local  parties  or 
cliques;  that  applications  and  requests  for  credits  be 
judged  solely  on  their  merits  as  banking  propositions. 

INCREASE  OP  RESPONSIBILITY  AND  OF  SALARY 

As  a  branch  manager  the  country  banker  will  have  a 
local  standing  quite  as  high  as,  and  probably  higher  than, 
his  standing  as  the  active  head  of  a  single-office  bank. 
Though  the  branch  manager's  power  to  grant  credits  is 
strictly  limited — he  having  to  get  the  chief  executive's 
approval  for  all  loans  exceeding  a  certain  sum,  which 
might  be  anywhere  from  $1,000  to  $2,000 — he  yet  is  the 
man  through  whom  all  would-be  borrowers  must  negoti- 
ate. The  general  manager  will  not  consider  propositions 
which  do  not  come  to  him  stamped  with  the  branch 
manager's  approval.  A  competent  and  careful  manager 
soon  gets  to  know  exactly  what  loans  will  go  through 
and  what  will  not,  and  he  can  thus  say  "yes"  and  "no'' 
to  most  of  his  customers  who  ask  for  credits  and  demand 
an  immediate  answer.  As  the  highest  resident  authority 
of  a  great  bank,  the  channel  whence  its  many  millions 
of  resources  are  placed  at  the  disposal  of  the  local  busi- 
ness men,  he  will  likely  stand  higher  than  as  cashier  of 
a  small  local  bank  which,  by  common  repute,  did  not 
have  the  funds  at  times  to  give  its  customers  all  the 
credits  they  required  and  to  which  their  positions  and 
responsibilities  fairly  entitled  them. 

79 


A    RATIONAL    BANKING    SYSTEM 

In  point  of  salary  the  banker  might  reasonably  expect 
a  larger  remuneration  on  the  conversion  of  his  independ- 
ent bank  into  a  branch;  for,  as  explained  in  another 
chapter,  the  business  of  the  bank  would  be  likely  to  ex- 
pand rapidly  after  the  change.  With  the  increase  of 
business  increased  pay  should,  and  doubtless  would,  be 
forthcoming. 

The  change  would  deliver  the  country  banker  from  a 
number  of  other  restrictions  and  duties.  Under  the 
present  system  he  has  to  give  a  good  deal  of  thought  to 
the  matter  of  the  maintenance  and  disposition  of  the 
bank's  cash  reserve;  under  the  branch  system  he  need 
not  worry  about  the  reserve  at  all,  for  the  general  man- 
ager himself  attends  to  that.  He  need  not  bother  himself 
either  over  the  investment  of  the  bank's  money  in  bonds, 
for  the  general  manager  does  that  also. 


V 

A   HYPOTHETICAL   BRANCH    BANK 

How  THE  BANKS  PERFORM  THEIR  FUNCTIONS  IN  NORMAL 

TIMES 

IT  is  time  now  to  take  up  the  matter  of  the  every-day 
relations  between  the  banks  and  the  other  parties  in 
the  community.  Panics  come  only  at  intervals.  Even 
in  the  United  States,  where  they  are  most  frequent,  they 
have  not  hitherto  appeared  oftener  than  once  in  a  dec- 
ade. Though  it  is  a  matter  of  importance  in  any 
country  that  the  banking  system  be  so  constructed  as  to 
be  able  to  withstand  successfully  the  shocks  resulting 
from  periodical  revulsions  of  credit,  it  is  a  matter  of  much 
greater  consequence  that  it  be  of  a  character  calculated 
to  lend  in  the  between  whiles  an  efficient  and  thorough 
encouragement,  within  certain  limits,  to  all  the  forms  of 
industry  and  trade  in  which  the  people  of  the  country 
are  engaged.  So  I  shall  now  proceed  to  point  out  how 
certain  great  American  industries  and  trades  fare  at  the 
hands  of  the  banks  in  normal  times,  from  day  to  day  and 
from  year  to  year.  Their  circumstances  may  then  be 
compared  with  the  circumstances  of  similar  industries 
and  trades  elsewhere  under  the  branch  system  of  bank- 
ing. By  placing  the  two  pictures  side  by  side  any  reader 
may  get  a  vivid  impression  as  to  some  of  the  differences, 
in  economic  effects,  of  the  two  kinds  of  banking. 

THE  MATTER  OP  EQUALITY  OF  LOANS  AND  DEPOSITS 

The  true  function  of  the  banks  in  any  locality  is  to 
facilitate  and  assist,  within  certain  limits,  the  carrying 

81 


A    RATIONAL    BANKING    SYSTEM 

on  of  those  pursuits  to  which  the  people  are  devoted. 
They  reach  their  highest  excellence  and  their  greatest 
usefulness  when  they  conform  flexibly,  in  the  several  sec- 
tions, to  the  peculiarities  of  condition  or  circumstance 
which  they  meet.  This  is  exactly  what  a  properly  con- 
stituted system  of  branch  banks  does;  and,  though  the 
local  single-office  banks  may  indeed  conform  in  certain 
respects  to  local  peculiarities  of  occupation  or  trade, 
they  are  not  constituted  to  cope  advantageously  with  the 
matter  of  inequality  of  loans  and  deposits.  It  is,  of 
course,  absurd  to  suppose  that  at  all  the  banking  points 
in  the  United  States  loans  and  deposits  should  be  exactly 
equal;  and  yet  that  is,  apparently,  one  of  the  things  on 
which  the  system  of  single-office  banks  is  predicated. 
The  experience  of  the  large  Canadian  banks,  with  branches 
in  every  part  of  the  Dominion,  is  that  in  only  a  small 
number  of  instances  do  the  branches  show  equality  of 
loans  and  deposits.  In  the  great  majority  of  cases  one 
will  overbalance  the  other.  Usually  it  is  found  that  the 
branches  in  the  farming  districts  of  the  eastern  provinces 
show  an  excess  of  deposits,  while  the  branches  in  the 
eastern  cities  and  manufacturing  towns,  and  the  general 
run  of  country  branches  in  the  western  provinces,  show 
an  excess  of  loans  and  discounts.  This  is  the  result  of 
encouraging  the  development  of  both  loans  and  deposits  to 
the  fullest  possible  extent  at  all  localities.  In  other  words, 
at  practically  all  points  both  loans  and  deposits  are  at  the 
natural  level. 

WHAT  THE  BANKS  CAN  LEND 

On  the  other  hand,  the  merest  tyro  in  banking  can 
easily  see  that,  at  every  point,  the  local  jartffTe-office  bank 
must  shape  its  policy,  in  regard  to  loans,  according  to 
the  amount  of  deposits  it  has.  In  this  sense  the  com- 
parison as  to  the  usefulness  to  the  locality  of  the  two 
kinds  of  banks  may  be  made  by  means  of  a  formula — 
thus,  each  single-office  bank  has  available  for  lending  in 

82 


A    HYPOTHETICAL    BRANCH    BANK 

its  locality  its  capital  and  surplus  plus  deposits  minus  its 
reserve  against  deposits,  while  the  branch  bank  may  be 
said  to  have  a  sum  equal  to  the  effective  natural  demand 
for  discounts  emanating  from  that  locality.  The  term 
effective  demand  is  here  taken  to  mean  the  demand  from 
parties  financially  and  otherwise  worthy  to  have  recog- 
nition. 

Critically  minded  persons  will  perhaps  object  that 
there  is  a  limit  to  the  lending  power  of  a  branch  bank  as 
well  as  to  that  of  a  local  bank,  and  that  there  would  be 
no  certainty  that  on  the  general  institution  of  branch 
banks  the  effective  demand  for  credits  would  be  cared  for 
at  each  particular  point  any  more  than  it  is  under  the 
present,  system.  For  would  not  the  head  office  issue 
instructions  to  cease  discounting  or  to  restrict  discounts 
whenever  the  bank's  condition  became  such  as  to  neces- 
sitate that  action  being  taken  ? 

The  answer  to  the  objection  is  that  a  properly  managed 
branch  bank,  its  management  having  full  confidence  in 
the  soundness  of  general  business  conditions,  would 
seek  to  complement  the  working  of  those  branches  at 
which  the  good  loans  showed  a  tendency  to  increase 
faster  than  the  deposits  by  opening  a  series  of  branches 
in  small  places  where  there  were  no  manufacturing  or 
other  businesses  that  would  require  large  advances.  By 
this  means,  and  by  means  of  the  gradual  accumulation  of 
deposits  at  its  older  branches,  with  perhaps  an  occasional 
increase  of  capital  stock,  it  would  probably  maintain  the 
proper  balance  between  its  loans  and  deposits,  and,  the 
times  being  normal,  it  would  likely  be  able  to  do  its  proper 
share  of  the  work  of  supporting  the  industries  and  trades 
carried  on  in  the  districts  where  its  branches  were  located. 

WHEN  THE  LOCAL  BANK  HAS  ALL  ITS  FUNDS  EMPLOYED 

Now  mark  this  difference  in  the  working  of  the  two 
systems :  The  local  single-office  bank,  on  being  asked  for 

83 


A    RATIONAL    BANKING    SYSTEM 

further  advances  when  its  funds  are  all  loaned  out,  simply 
refuses  to  comply.  The  local  would-be  borrowers  are 
thereby  discommoded,  and  possibly  they  are  prevented 
from  engaging  in  business  transactions  that  would  have 
resulted  in  sure  profits  and  perhaps  in  providing  employ- 
ment for  additional  workingmen.  But  the  branch  bank 
extends  the  accommodation,  the  security  of  course  being 
satisfactory,  and  the  projects  of  the  applicants  being 
such  as  the  bank  might  with  propriety  support.  In  that 
case  the  local  industries  and  trades  get  a  better  support 
than  they  could  expect  from  the  single-office  banks.  But 
that  is  not  all.  Owing  to  the  demand  for  discounts 
emanating  from  this  point  and  from  others  like  it,  hun- 
dreds of  little  places  which  can  never  hope  to  have  a 
bank  under  the  present  system  would  be  accorded  bankT 
ing  facilities  of  the  highest  class.  At  all  branches  the 
people  would  be  encouraged  to  develop  to  the  utmost 
their  natural  bent,  whether  that  bent  was  to  borrow  or 
to  deposit;  at  all  points  the  deposits  and  loans  would 
be  at  the  natural  level,  and  a  scientific  and  very  effective 
distribution  of  society's  deposit  fund  accomplished; 
while  with  the  independent  banks  it  is  obvious  that,  ex- 
cept in  the  comparatively  few  cases  where  an  equality 
of  loans  and  deposits  comes  about  through  the  deposit 
fund  of  the  locality  balancing  naturally  with  the  demand 
for  discounts,  one  or  other  of  the  two  items  must  be  at 
an  arbitrary  or  artificial  level;  and  one  or  other  of  the 
two  great  sections  of  the  people — would-be  borrowers  and 
would-be  depositors — must  be  to  some  extent  incon- 
venienced thereby. 


LOANS   AND  DEPOSITS   BY  GEOGRAPHICAL  DIVISIONS 

The  following  table  shows  the  situation  in  the  differ- 
ent parts  of  the  United  States,  so  far  as  the  national 
banks  are  concerned: 

84 


A    HYPOTHETICAL    BRANCH    BANK 


NATIONAL  BANKS 

September  i,  1910  Loans  and  Discounts  Deposits* 

New  England,  $    477,310,961  $    446,034,331 

Eastern,  2,069,013,437  1,984,361,789 

Southern,  664,412,284  552,622,615 

Middle  Western,  1,542,126,247  1,428,726,621 

Western,  356,807,264  398,955,37° 

Pacific,  356,205,278  382,848,900 

$5,465,875,471  $5,193,549,626 

*In  the  deposits  are  included  "Individual  deposits,"  "United  States  de- 
posits," "  Deposits  of  United  States  disbursing  officers. "  Deposits  shown  in  the 
abstract  under  the  headings  "  Due  to  other  national  banks,"  "  Due  to  state  and 
private  banks  and  bankers,"  "  Due  to  trust  companies  and  savings-banks," 
aggregating  $1,925,875,470,  are  not  included,  because  they  represent,  to  a  con- 
siderable extent,  a  duplication  of  figures. 

It  is  safe  to  say  that  if  a  statement  of  the  loans  and  de- 
posits of  the  Canadian  banks  covering  the  several  sections 
of  the  Dominion  in  which  the  business  of  each  section 
was  given  by  itself,  could  be  studied,  such  a  balancing 
of  the  two  items  would  not  be  seen.  The  Winnipeg  man- 
ager of  an  important  institution,  which  covers  nearly  the 
whole  Dominion,  informed  me  that  his  bank  had  loaned 
in  Western  Canada  at  least  three  dollars  to  every  dollar 
of  Western  deposits.  And  there  is  no  reason  to  suppose 
that  the  condition  of  the  other  leading  institutions  is 
materially  different. 

WHEN  LOANS  AND  DEPOSITS  ARE  AT  THEIR  NATURAL 

LEVEL 

The  point  is  that  if  the  loans  and  deposits  were  left 
to  seek  their  natural  level,  as  is  the  case  under  a  proper 
system  of  branch  banks,  there  would  surely  be  in  some 
of  the  sections  of  the  United  States  a  wide  disparity  be- 
tween the  two  items.  The  fact  that  they  are  so  nearly 
equal  in  every  part  of  the  country  points  to  the  con- 
clusion that  both  are  kept  down  to  an  arbitrary  level — in 
some  districts  borrowers  do  not  get  the  accommodation 

8s 


A    RATIONAL    BANKING    SYSTEM 

to  which  they  are  entitled,  and  in  others  poor  facilities 
are  extended  to  depositors. 

So,  when  conditions  in  the  financial  world  are  normal, 
the  various  offices  of  a  strong  branch  bank  are  expected 
to  do  all  the  good  business,  deposits  and  discounts,  that 
they  can  get  or  handle.  It  does  not  matter  at  all,  in  the 
case  of  a  bank  with  a  well-balanced  system  of  branches, 
whether  deposits  or  discounts  heavily  overbalance  at 
any  particular  office. 

COURSE  OF  THE  LOANS  IN  PERIODS  OP  STRINGENCY 

It  may  be  conceded,  however,  that  in  periods  of  great 
industrial  and  commercial  activity,  when  speculation  is 
rife  and  prices  are  high,  the  increase  of  loans  taking  place 
generally  at  all  branches  in  response  to  the  increased 
natural  demand  for  credits  then  effects  a  gradual  ab- 
sorption of  the  bank's  surplus  of  liquid  balances  into  its 
loans  and  discounts.  Usually,  too,  during  a  period  of 
this  kind  deposits  will  show  a  tendency  to  remain  sta- 
tionary, or  perhaps  to  recede.  Opportunities  for  the  in- 
vestment of  capital  are  so  numerous  and  inviting  that 
the  owners  of  cash  funds  are  induced  to  draw  down  their 
deposits  in  order  to  take  advantage  of  them.  When  the 
\  process  of  loan  expansion  has  gone  a  certain  distance 
-'the  bank  is  forced  to  move  cautiously  in  the  matter  of 
entering  into  new  commitments.  Unless  it  does  so  there 
will  be  danger  of  its  cash  reserves  falling  so  low  as  to 
make  its  condition  unsafe,  and  perhaps  prevent  it  from 
pursuing  a  dignified  course  in  meeting  its  daily  balances 
at  the  various  clearing-houses.  Then  it  is  to  be  expected 
that  the  branch  managers  will  get  instructions  to  put  the 
curb  upon  their  borrowing  customers.  The  chief  execu- 
tive officer  sees  the  condition  of  his  own  bank.  He  per- 
haps knows  that  other  representative  banks  are  in  much 
the  same  case,  and  his  experience  teaches  him  that  the 
country  may  be  speeding  toward  a  crisis  or  revulsion  of 

86 


A    HYPOTHETICAL    BRANCH    BANK 

some  kind.  Therefore,  it  may  be  said  that  when  the  con- 
dition of  a  large  and  well-managed  branch  bank  becomes 
such  as  to  cause  its  executive  to  withhold  accommodation 
from  good  borrowers,  the  chances  are  that  it  is  in  the 
real  interest  of  the  borrowers  to  have  their  credits  cur- 
tailed and  their  operations  depending  upon  credit  reduced 
to  smaller  volume. 

THE  CASES  OF  JASONVILLE  AND  THOMPSONTOWN 

This  seems  to  be  a  suitable  place  to  refer  to  an  editorial 
which  appeared  in  the  Philadelphia  Saturday  Evening 
Post  on  February  13,  1909.  As  it  expresses  aptly  the 
opinion  held  by  a  large  number  of  people  in  the  United 
States,  it  is  reproduced.  The  article  says:  "The  Cana- 
dian banking  system  is  much  admired  in  this  country  by 
theorists  and  by  certain  metropolitan  financiers;  but 
whenever  its  adoption  is  urged  some  ten  thousand  country 
banks  rise  up  to  protest. 

"Our  country  bank  is  decidedly  a  local  institution; 
local  men  own  and  operate  it  with  an  eye  single  to  local 
conditions;  it  is  chock  full  of  the  town's  spirit.  A  branch 
bank,  on  the  other  hand,  would  belong  to  New  York  or 
Chicago.  To  its  directing  mind — regarding  Jason ville 
impersonally  as  merely  one  of  several  hundred  units — it 
would  be  a  matter  of  complete  indifference  whether  the 
new  canning  factory  located  there  or  at  Thompsontown, 
ten  miles  beyond.  That  our  independent  country  bank 
is,  on  the  whole,  the  more  useful  institution  seems  to  us 
incontrovertible." 

THE  BRANCH  BANK  AND  LOCAL  DEVELOPMENT 

The  whole  of  this  book  is  devoted  to  the  purpose  of 
controverting  the  idea  that  the  small  local  bank  is  more 
useful  than  the  branch.  I  hope  it  will  be  conceded  that 
something  has  already  been  done  along  that  line.  With 
reference  to  the  editor's  statement  that  the  directing 

8? 


A    RATIONAL    BANKING    SYSTEM 

mind  of  a  great  branch  bank  would  be  completely  indif- 
ferent about  the  campaign  over  the  new  canning  factory, 
it  can  be  said  that  he  would  not  be  indifferent  any  more 
than  the  president  of  a  great  railroad  system  is  indiffer- 
ent about  the  establishment  of  new  industries  along  his 
line  of  railroad.  And  in  any  case  the  manager  of  the 
local  branch  bank  would  not  be  indifferent.  If  the  can- 
ning factory  comes  to  Jasonville  and  he  succeeds  in  getting 
the  account,  it  will  increase  the  business  and  profits  of 
his  branch,  and  perhaps  lead  to  an  increase  of  his  own 
salary.  Therefore,  the  branch  manager  fights  stoutly 
side  by  side  with  the  other  Jasonville  citizens  for  the 
acquisition  of  the  factory.  And,  further,  when  the  factory 
is  established  he  will  get  for  it  a  credit  which  will  be  in- 
finitely more  valuable  to  it  than  any  credit  the  local 
bank  could  give.  If  there  is  a  reasonable  prospect  of  the 
factory  proving  a  success,  and  if  the  proprietors  are  able 
and  willing  to  furnish  security  that  will  make  the  bank's 
position  safe,  the  branch  manager  will  have  little  diffi- 
culty in  obtaining  the  approval  of  his  executive  superior 
to  the  credit  for  the  new  account. 

But  if  the  thing  is  clearly  doomed  to  failure,  or  if  the 
proprietors  of  the  factory  aim  to  get  large  loans  on  in- 
adequate security,  or  on  no  security  at  all,  the  credit  will 
not  go  through.  And  it  is  as  likely  as  not,  if  loans  are 
made  to  the  canning  interests  on  this  basis  by  a  purely 
local  bank,  that  both  the  stockholders  of  the  bank  and  the 
citizens  who  interest  themselves  in  the  new  industry  will  suf- 
fer loss. 

A  BRANCH  VERSUS  A  LOCAL  BANK 

I  shall  now  undertake  to  describe  in  some  detail  the 
relations  existing  between  the  banks  and  some  classes 
of  their  customers.  In  order  to  make  the  description 
lucid  I  shall  make  use  of  a  couple  of  hypothetical  branch 
banks,  and  explain  just  what  the  people  might  expect 
from  them  in  the  way  of  facilities  and  accommodation. 

88 


A    HYPOTHETICAL    BRANCH    BANK 

It  will,  of  course,  be  necessary  to  picture  conditions  in 
two  or  more  parts  of  the  country,  so  as  to  cover  a  few 
of  the  great  forms  of  activity  in  which  Americans  are 
engaged.  It  has  occurred  to  me  that  an  interesting 
picture  might  be  drawn  of  a  competitive  struggle  between 
a  typical  local  bank  of  the  present  day  and  a  typical 
branch  bank,  for  the  business  of  a  moderate  sized  country 
town,  let  us  say  in  Massachusetts,  which  devotes  itself, 
to  some  little  extent,  to  manufacturing. 

We  may  suppose  that  in  the  town  selected  for  illustra- 
tion there  is  but  one  bank,  and  it  does  a  thriving  business. 
It  has  a  capital  of  $100,000,  a  surplus  of  $50,000,  and 
total  assets  of  about  $900,000.  The  bank  has  on  its 
board  half  a  dozen  of  the  most  substantial  business  men 
in  the  place,  and  the  stock  is  scattered  among  the  citizens. 
Perhaps  a  couple  of  the  local  manufacturers  are  on  the 
directorate. 

THE  BANK  OF  MASSACHUSETTS 

Let  us  for  the  sake  of  illustration  assume  that  the  laws 
of  the  United  States  have  been  broadened  and  liberalized 
so  as  to  permit  the  organization  and  practical  operation 
of  large  branch  banks  of  the  Canadian  pattern  of  mer- 
cantile banks — that  is  to  say,  employing  the  bulk  of  their 
resources  in  mercantile  loans  and  advances,  and  keeping 
in  cash  and  at  call  only  enough  to  enable  them  to  go 
their  ways  with  dignity  and  to  meet  emergencies  without 
straining.  Now  it  happens  that  the  Bank  of  Massa- 
chusetts—  a  hypothetical  branch  bank  of  this  descrip- 
tion, with  capital  of  $10,000,000,  surplus  of  $5,000,000, 
total  assets  of  $150,000,000,  and  some  one  hundred  and 
fifty  branches,  largely  in  the  State  of  Massachusetts,  but 
not  confined  to  that  state — wishes  to  establish  a  branch 
in  the  hypothetical  town  to  which  I  have  referred.  As 
the  bank  has  been  quite  largely  built  up,  or,  rather, 
evolved,  through  absorbing  local  single-office  banks,  it 
first  endeavors  to  induce  the  local  bank  which  is  in  sole 


A    RATIONAL    BANKING    SYSTEM 

possession  of  the  field  to  merge  with  it  and  become  one 
of  its  branches.  For  the  stock  of  the  local  bank  it  offers 
a  price  slightly  higher  than  the  level  at  which  it  has 
been  selling,  and  invites  the  stockholders  to  accept  its 
own  stock  in  payment  at  the  market  rate,  as  established 
by  transactions  in  the  Boston  Stock  Exchange.  The 
executive  officers  of  the  Bank  of  Massachusetts  are  able 
to  make  this  offer,  because  they  know  from  experience 
that,  operating  this  local  bank  as  a  branch,  they  can 
make  it  earn  more  on  its  stock  than  it  earns  in  its  in- 
dependent condition.  However,  the  local  directors  and 
stockholders  do  not  wish  to  give  up  their  individuality, 
or  to  lose  the  identity  of  their  local  bank,  of  which  they 
are  justly  proud.  Then  the  Bank  of  Massachusetts  de- 
cides to  open  a  branch  in  opposition  and  to  build  up  a 
business  of  its  own.  This  gives  a  good  opportunity  of 
studying  the  methods  that  would  be  resorted  to  by 
branch  banks,  and  also  of  comparing  the  usefulness  to 
the  locality  of  the  two  kinds  of  institutions.  It  is  to  be 
remembered  that  there  is  no  legal  compulsion  either  way 
upon  the  inhabitants.  Owing  to  its  local  organization, 
the  local  stockholding  and  its  established  footing,  the 
bank  already  on  the  ground  has  all  the  advantage.  It 
may  be  supposed  that  the  sympathy  and  sentiment  of  the 
townspeople  and  of  the  people  of  the  surrounding  country 
would  be  altogether  on  its  side.  If  the  branch  bank  suc- 
ceeds in  building  up  a  profitable  business  under  these 
circumstances  it  must  positively  be  because  it  extends 
facilities  which  the  local  business  men  cannot  afford  to 
ignore.  Assuming  that  a  thoroughly  capable  man  is 
appointed  as  manager  of  the  branch  to  be  established, 
let  us  follow  him  in  his  handling  of  the  bank's  affairs. 

POLICY  OF  THE  BRANCH  MANAGER 

First  of  all  there  is  the  matter  of  premises.     The  bank 
must  be  housed  in  a  suitable  building  in  a  central  loca- 

90 


A    HYPOTHETICAL    BRANCH    BANK 

tion.  Its  premises  must  be  compatible  with  its  dignity 
as  a  powerful  institution.  It  might  be  necessary  to  pro- 
vide a  building  of  its  own.  If  that  were  done  the  plans 
therefor  would  take  account  of  the  kind  of  building  pos- 
sessed by  its  local  competitor.  It  would  be  seen  too  that 
the  local  bank  did  not  outclass  it  in  the  matter  of  a  build- 
ing. On  the  building  the  bank's  sign,  "Bank  of  Massa- 
chusetts," would  appear  with  impressive  simplicity.  And 
in  large  letters  on  the  window  screens  would  be  seen  the 
legend,  "Capital  $10,000,000,  Surplus  $5,000,000,  Total 
Resources  $150,000,000."  Possibly  the  window  screens 
would  also  bear  the  intimation  that  interest  was  allowed 
on  deposits. 

One  of  the  earliest  arrangements  made  by  the  branch 
manager  would  be  the  engagement  of  a  lawyer  or  solici- 
tor. A  man  would  be  selected  who  was  not  already  re- 
tained by  the  local  bank — preferably  a  man  in  position 
to  influence  business  and  desirable  accounts.  To  him  it 
is  explained  that  he  will  get  at  regular  rates  all  the  law\/ 
business  of  the  Bank  of  Massachusetts  and  of  its  branches 
emanating  from  this  locality.  In  return  he  is  expected 
to  keep  his  whole  account  at  the  branch  and  ally  him- 
self with  it.  If  this  is  more  than  he  wishes  to  undertake 
the  appointment  of  course  will  go  to  some  other  lawyer, 
providing  one  with  the  requisite  ability  can  be  had. 

THE  RECORD  OF  RATINGS  AND  CHARACTERS 

This  ally  gained,  the  next  step  is  to  procure  reliable  in- 
formation about  all  the  business  men  in  town,  and  about 
the  principal  farmers  and  other  residents  of  the  tributary 
district.  By  the  aid  of  mercantile  agency  reports,  of 
records  in  the  bank's  head  office,  and  of  particulars  gleaned 
from  parties  in  town  who  can  be  depended  upon  to  give 
reliable  data,  the  matter  of  the  financial  standing  of 
everybody  who  may  apply  to  the  bank  for  loans  is  gone 
into  as  thoroughly  as  possible.  It  would  not  be  difficult 
7  91 


A    RATIONAL    BANKING    SYSTEM 

to  find  confidential  advisers  of  this  sort  who  could  be 
depended  upon.  The  information  they  furnish  is  checked 
up  by  inquiry  from  other  sources,  and  the  whole  classified 
and  arranged  so  as  to  be  readily  accessible.  All  this  need 
not  necessarily  be  taken  as  accurate;  each  item  has  only 
its  certain  standing  as  So-and-so's  estimate.  Subsequent 
dealings  will,  in  a  number  of  cases,  provide  the  means  of 
verifying  or  revising  the  estimates  secured. 

It  is  the  bank's  intention,  while  the  general  situation 
throughout  the  country  is  sound  and  free  from  alarming 
signs,  to  refuse  no  request  for  credit  made  by  a  worthy 
applicant  who  offers  adequate  security  and  who  proposes 
to  embark  the  proceeds  in  something  the  bank  may  safely 
and  properly  support.  And  it  is  necessary  to  direct  the 
preparations  in  a  careful  and  scientific  manner. 

MAKING  USE  OP  OUTSIDE  CONNECTIONS 

For  the  formal  opening  a  staff  must  be  got  ready.  A 
trained  man  will  be  drafted  from  another  branch  as 
second  in  command.  At  the  outset  he  probably  will  fill 
a  position  in  which  the  duties  of  manager's  lieutenant  and 
teller  are  consolidated.  Then  a  bright  young  local  fellow 
will  be  enlisted  as  junior.  This  staff  of  three  will  suffice 
for  the  beginning.  Next,  the  manager  will  take  steps  to 
ascertain  which  of  the  local  business  men  have  close  re- 
lations with  the  bank's  clients  in  other  places.  It  may 
transpire  that  some  large  Boston  house  connected  with 
the  bank,  or  some  house  in  another  city  that  is  beholden 
to  it,  can  influence  or  control  the  banking  business  of  one 
or  mor  local  concerns.  If  the  local  accounts  are  de- 
sirable this  outside  influence  may  be  evoked,  perhaps 
resulting  in  the  acquisition  of  a  few  good  accounts. 

As  the  existing  local  bank  has  been  alone  in  the  field, 
it  is  possible  that  its  rates  of  discount  have  been  rather 
high  in  the  cases  of  a  number  of  accounts.  On  the  ap- 
pearance of  opposition  perhaps  these  high  rates  would 

92 


A    HYPOTHETICAL    BRANCH    BANK 

come  down.  The  customers  thus  affected  accept  the 
reduction,  but  they  have,  all  the  same,  a  kindly  feeling 
for  the  new-comers  whose  advent  was  the  cause  of  their 
better  fortune.  The  branch  manager  is  satisfied  to  leave 
it  at  that  for  the  present.  He  has  no  intention  of  in- 
augurating a  rate-cutting  war.  He  wants  business,  to  be 
sure,  but  it  must  be  profitable  business. 

THE  CHRONIC  MALCONTENTS 

Everybody  who  has  had  much  actual  experience  in  the 
banking  business  must  have  noticed  that  in  practically 
every  town  or  community  are  to  be  found  a  few  customers 
with  whom  it  is  next  to  impossible  to  preserve  cordial  or 
amicable  relations.  No  matter  how  well  they  are  treated 
they  are  always  seeking  occasion  for  quarrels.  Not  in- 
frequently their  business  is  of  some  considerable  value 
to  the  bank;  but  its  value  is  constantly  overshadowed 
by  the  unpleasantness  of  the  relations  with  them.  Pos- 
sibly a  couple  of  these  chronic  malcontents  will  transfer 
their  accounts  immediately  the  new  bank  opens,  but  it 
is  by  no  means  certain  that  their  business  will  be  re- 
tained for  any  length  of  time. 

So  far  nothing  very  important  has  been  achieved  by 
the  new-comers.  The  general  body  of  the  town  business 
holds  firmly  to  the  local  bank.  Indeed,  no  earnest,  direct 
effort  has  been  made  to  dislodge  it.  However,  the  Bank 
of  Massachusetts  had  a  definite  end  in  view  when  it  de- 
cided to  open  this  branch.  It  was  because  of  the  con- 
fidence it  had  that  its  end  would  be  attained  that  it  built 
its  local  premises.  The  actions  and  policy  of  the  branch 
manager,  heretofore  described,  are  merely  the  prelimi- 
nary moves  in  the  campaign. 

THE  MANUFACTURERS'  ACCOUNTS 

It  has  been  mentioned  that  there  are  a  number  of 
rather  extensive  manufacturing  plants  located  here.  The 

93 


A    RATIONAL    BANKING    SYSTEM 

accounts  of  these  manufacturers  constitute  the  chief 
prize  which  the  Boston  executive  aimed  to  secure.  Be- 
fore, however,  making  advances  of  any  kind,  the  branch 
manager,  with  the  assistance  of  his  head  office,  satisfies 
himself  thoroughly  as  to  the  financial  responsibility,  the 
character,  and  record  of  each  one  of  the  various  manu- 
facturers, and  makes  himself  familiar  with  the  nature  of 
their  businesses,  the  markets  they  sell  in,  the  products 
they  make,  their  prospects,  etc.  Let  us  assume  that  there 
are  five  plants,  two  of  which  are  extensive,  while  the  others 
are  of  moderate  size.  The  owners  of  the  large  plants  are 
wealthy  and  Ai  risks — one  of  them  is  a  director  of  the  local 
bank.  Of  the  three  smaller  plants  two  are  owned  by  parties 
whose  financial  strength  is  considerable  enough;  but  it  is 
suspected  that  the  owner  of  the  fifth  plant  is  laboring  a  little. 
Though  these  manufacturers — the  four  of  them  at  any 
rate — are  well  rated,  and  though  all  in  the  neighborhood 
consider  them  wealthy  and  safe,  they  require  to  borrow 
every  year  more  than  the  local  bank  can  give  them. 
The  banking  law,  of  course,  strictly  limits  the  direct  ad- 
vances which  a  bank  may  make  to  any  one  borrower; 
and  even  if  the  law  did  not  impose  this  restriction  the 
dictates  of  prudence  and  common  sense  would  prevent 
any  banker  worthy  the  name  from  putting  half  or  two- 
thirds  of  his  resources  into  one  loan,  no  matter  how  good 
it  might  be.  If  that  were  done  the  rank  and  file  of  small 
borrowers  in  town  would  raise  such  a  disturbance  as  would 
bring  opposition  at  once.  So  the  position  of  the  manu- 
facturing interests  here,  in  regard  to  banking  accommoda- 
tion, was  what  it  must  nearly  always  be  under  the  system 
of  local  single-office  banks — unsatisfactory  and  tending 
to  restrict  their  operations  unnecessarily. 

THE  MANUFACTURER  AND  THE  NOTE-BROKER 

One  of  the   large   concerns   has   required   to  borrow 
$400,000  at  a  certain  season  of  each  year  when  stocking 

94 


A    HYPOTHETICAL    BRANCH    BANK 

up  with  raw  materials.  At  this  season  it  could  use 
$600,000  quite  conveniently,  but  the  unsatisfactory  bor- 
rowing conditions  have  deterred  it  from  undertaking 
more  than  $400,000.  To  raise  this  sum  it  has  to  be 
beholden  to  perhaps  a  score  of  banking  institutions  in 
different  parts  of  the  United  States.  These  banks  hold 
the  paper  in  lots  of  anywhere  from  $5,000  up  to  $50,000. 
The  local  bank  customarily  takes  $10,000  directly,  and 
will  perhaps  lend  $40,000  or  $50,000  on  trade  paper  or 
in  some  indirect  way  so  as  not  to  violate  the  law.  All 
the  paper,  except  the  portion  taken  by  the  local  bank, 
is  placed  through  a  note-broker  in  New  York  or  Boston. 
This  broker  asks  for  full  particulars  of  the  manufacturer's 
position.  Sometimes  he  gets  them  and  sometimes  not. 
When  he  has  all  the  information  possible,  he  circularizes 
his  list  of  clients,  composed  of  banks  and  private  in- 
vestors, inviting  each  to  take  a  part  of  the  notes  offered. 
Though  the  operation  is  pleasantly  described  as  placing 
the  notes  upon  the  market,  it  amounts  in  effect  to  an 
application  by  the  manufacturer  (whose  business  is 
strictly  a  private  business)  for  credit,  addressed  to  all 
these  parties.  Any  of  them,  with  or  without  the  in- 
clination to  purchase,  may  ask  for  the  details  of  the 
manufacturer's  position,  his  balance  sheet,  and  profits, 
if  he  has  furnished  all  that  information.  To  a  high- 
spirited  borrower  this  comes  as  a  detestable  necessity. 
Plenty  there  are  who  cannot  bring  themselves  to  submit 
to  it.  Sooner  than  do  so  they  forego  the  sure  profit  at- 
tendant upon  borrowing — preferring  to  restrict  their 
operations  and  to  decline  orders  from  would-be  customers. 
Other  considerations  than  that  of  preserving  their  self-re- 
spect operate  to  induce  them  to  follow  this  policy  of  re- 
straint. Should  a  financial  crisis  develop  in  New  York,  or 
in  other  parts  of  the  country,  they  are  threatened  with  the 
fate  that  befell  the  Westinghouse  Company  in  1907 ,  because 
of  the  diffusion  of  their  indebtedness  among  so  many  hold- 
ers none  of  whom  has  any  but  a  passing  interest  in  them. 

95 


A    RATIONAL    BANKING    SYSTEM 
BORROWING  FROM  A  NEW  YORK  OR  BOSTON  BANK 

There  is  another  way  in  which  a  large  borrower  in  the 
interior  of  the  United  States  may  get  the  accommodation 
which  his  local  bank  is  unable  to  provide.  He  may  get 
a  line  of  credit  from  a  large  New  York  or  Boston  bank, 
and  dispense  with  the  note-broker  altogether.  I  under- 
stand that  a  considerable  business  of  this  kind  is  done. 
It  is  an  awkward  attempt  at  adopting  some  of  the  con- 
veniences of  branch  banking.  The  borrower  in  this  case 
looks  to  a  far-away  executive  for  his  loans  exactly  as  do 
most  of  the  borrowers  under  the  branch  system.  But 
under  the  branch  system  the  borrower  is  able  to  ne- 
gotiate with  a  sympathetic  and  influential  intermediary 
living  in  his  own  town  and  acquainted  with  his  business. 

WHAT  THE  BRANCH  BANK  OFFERS  TO  THE  MANUFACTURER 

This  description  of  the  financial  conditions  under  which 
the  local  manufacturers  had  been  working  is  sufficient  to 
give  the  reader  an  idea  as  to  the  feelings  with  which  they 
would  welcome  what  the  branch  manager  had  to  offer 
them.  To  this  man,  who  had  been  borrowing  $400,000 
through  the  agency  of  the  note-brokers,  the  branch  man- 
ager proposes  that  application  be  made  to  the  Bank  of 
Massachusetts  for  a  credit  of  that  sum,  or  of  half  a 
million.  The  rate  of  interest  would  be  the  same  as  he 
had  been  paying;  the  credit  would  remain  open  during 
the  manufacturing  season,  and  the  loans  would  be  ex- 
pected to  run  down  and  off  in  the  natural  course  of  the 
manufacturer's  business.  If  the  credit  be  approved  the 
bank  would  stand  ready,  all  through  the  season,  to  ad- 
vance funds  in  the  manner  agreed  upon  and  as  its  cus- 
tomer needed  them,  up  to  the  maximum  named;  its  ex- 
tensive system  of  branches  and  correspondents  would  be 
at  his  service  for  making  collections  from  his  debtors,  and 
for  providing  him  with  information  regarding  them;  it 

96 


A 


A    HYPOTHETICAL    BRANCH    BANK 

would  aid  him  and  advise  him  to  the  best  of  its  ability, 
as  it  would  be  deeply  interested  in  his  success.  Within 
certain  well-defined  limits  it  would  back  him  and  support 
him  in  developing  his  trade,  almost  as  if  it  were  a  partner. 
Should  a  panic  or  a  crisis  develop,  being  so  heavily  in- 
volved with  him,  its  interest  would  lie  in  enabling  him 
to  meet  his  outside  liabilities.  For  it  to  suffer  him  to 
fail  would  endanger  the  advance,  and  might  have  some 
effect  in  provoking  a  run  of  depositors.  Also,  its  reputa- 
tion and  credit  would  be  involved  in  its  seeing  its  worthy 
customers  safe  through  the  disturbance. 

THE  ADVANTAGES  IN  THE  BRANCH  BANK'S  PROPOSITION 

Can  any  one  doubt  what  decision  the  average  Ameri- 
can manufacturer  would  take  on  having  a  proposition 
of  this  kind  submitted  to  him  by  a  bank  of  the  type  of 
the  Bank  of  Massachusetts?  Even  if  the  local  manu- 
facturer here  referred  to  were  a  director  of  the  local  bank 
there  is  hardly  room  for  doubt  as  to  his  decision.  If  the 
proposed  arrangement  worked  out  as  the  branch  man- 
ager said,  and  there  was  every  reason  to  think  it  would, 
it  meant  freedom  from  the  necessity  of  publishing  his 
affairs  for  the  benefit  of  a  large  body  of  individuals  for 
whom  he  did  not  care  a  button,  and  who  took  but  the 
slightest  interest  in  him.  Better  than  all,  it  meant  more 
profits.  If  the  scheme  worked  smoothly  and  pleasantly 
the  first  year,  why  he  might  next  year  apply  for  a  larger 
sum  and  take  the  orders  of  the  parties  he  had  had  to  turn 
down.  After  a  couple  or  three  years  it  might  be  that  he 
could  use  eight  hundred  thousand  or  a  million  without 
laying  himself  open  to  the  charge  of  over  -  extending 
himself. 

So  he  decides  to  apply  for  the  credit  and  to  transfer 
his  account.  He  feels  that  he  cannot  ignore  the  ad- 
vantages which  the  branch  institution  holds  out  to  him. 
For  his  business  the  branch  bank  is  incomparably  more 

97 


A    RATIONAL    BANKING    SYSTEM 

useful.  As  the  Bank  of  Massachusetts'  loans  enable  him 
to  make  more  profits,  and  with  them  to  enlarge  his 
capacity  and  increase  his  force  of  workmen,  the  bank  in 
this  respect  benefits  local  industry  to  a  greater  extent 
than  does  the  local  bank. 

THE  BRANCH  ON  A  PAYING  BASIS 

As  for  the  new  branch  bank,  the  acquisition  of  this  one 
large  account  will  probably  put  it  upon  a  paying  basis. 
And,  as  the  arguments  which  were  successful  in  the  case 
of  this  first  manufacturer  will  possess  an  equal  force  with 
his  brother  manufacturers,  there  is  no  reason  to  suppose 
that  they  will  be  less  ready  than  he  was  to  take  the  prof- 
fered advantages.  Assuming  that,  in  the  course  of  a  year 
or  two,  three  of  the  good  manufacturing  accounts  were 
obtained,  and  head-office  approval  secured  for  their  ap- 
plications, it  is  altogether  likely  that  the  branch  would 
have  a  discount  business  of  considerably  more  than  a 
million  dollars,  with  excellent  prospects  of  further  in- 
crease. It  is  worthy  of  special  notice  that  although  the 
new  branch  is  now  transacting  a  larger  business  in  loans 
than  the  earlier  established  local  bank  is  transacting,  it 
has  taken  only  a  small  part  from  its  local  competitor. 
The  bulk  has  been  taken  from  the  note-brokers  and  from 
distant  banks  which  do  not  notice  the  defection.  And 
part  of  the  new  loan  business  is  newly  called  into  exist- 
ence and  represents  a  distinct  addition  to  the  industrial 
power  of  the  country. 


VI 

A  HYPOTHETICAL  BRANCH  BANK  (Concluded) 
THE  BANK  OF  MASSACHUSETTS'  DEPOSIT  BRANCHES 

A 5  it  will  not  perhaps  be  exactly  clear  to  some  readers 
how  this  branch  bank  could,  at  a  point  where  it  had 
little  or  no  deposits,  place  a  million  dollars  at  the  disposal 
of  the  local  industries,  I  shall,  before  proceeding  further 
with  the  story  of  the  development  of  the  branch's  busi- 
ness, describe  the  methods  and  policy  by  which  this 
million  and  many  others  like  it  are  produced.  A  brief  ref- 
erence has  already  been  made  to  the  fact  that  a  well- 
governed  branch  bank  will  complement  a  branch  at  which 
the  loans  exceed  the  deposits  by  establishing  another 
branch  at  a  point  where  deposits  will  exceed  the  loans. 
Very  likely  the  Bank  of  Massachusetts  will  be  obliged  to 
open  eight  or  ten  new  offices  in  order  to  complement  or 
balance  the  operations  of  this  branch  it  has  just  opened 
in  the  small  manufacturing  town  we  haye  been  dealing 
with,  and  which  we  may  call  the  town  of  X.  Now  let  us 
see  in  what  kind  of  places  these  complementary  branches 
are  planted,  and  what  kind  of  business  it  is  that  they 
transact. 

There  are  in  the  United  States  thousands  of  quiet 
country  villages  possessing  no  manufactures  or  other 
enterprises  that  call  for  the  extensive  use  of  banking 
credits.  A  few  stores,  a  couple  of  hotels,  a  blacksmith 
shop  or  two,  one  or  two  agents  or  dealers  handling  agri- 
cultural implements,  may  comprise  the  business  estab- 
lishments of  a  place  of  this  kind.  Its  population  may  be 

99 


A    RATIONAL    BANKING    SYSTEM 

anywhere  from  two  hundred  to  thirteen  hundred.  It  has 
no  bank.  A  national  bank  would  be  out  of  the  question, 
for  there  would  be  no  employment  locally  for  the  de- 
posits it  would  get,  to  say  nothing  of  its  capital  funds, 
which  must  be  not  less  than  $25,000  according  to  law. 
Neither  is  there  any  inducement  to  start  a  state  bank. 
The  place  is  sleepy,  nearly  devoid  of  enterprise.  A  note- 
shark  capitalist  may,  however,  be  found  there,  and  if  so 
he  probably  fleeces  the  poorer  farmers  of  the  neighbor- 
hood, and  the  citizens  too,  whenever  he  gets  the  chance. 
Neither  the  farmers  nor  the  townspeople  have  enough 
confidence  in  him  to  entrust  him  with  their  deposits. 
Consequently,  while  a  few  go  to  the  trouble  of  sending 
deposits  by  mail  to  banks  in  distant  cities  or  towns,  the 
majority  of  the  people  govern  their  financial  affairs  as 
they  would  if  there  were  not  any  banks  in  the  country. 
They  keep  cash  in  their  houses  and  stores  and  on  their 
persons;  their  payments  are  made  altogether  in  cash. 

RELATIONS  WITH  THE  RURAL  CLASSES 

Into  this  little  place  comes  the  Bank  of  Massachusetts 
with  all  the  prestige  of  its  immense  resources.  Manifestly 
the  conditions  here  are  vastly  different  from  those  ob- 
taining in  X.  There  the  bank  aimed  at  the  acquisition 
of  a  large  discount  business.  To  handle  the  large  manu- 
facturing accounts  and  the  other  business  it  was  neces- 
sary to  have  a  skilled  manager  and  to  pay  him  a  good 
salary.  But  here  the  business  will  be  mostly  deposits. 
Such  loans  as  are  asked  for  will  be  small  and  easily 
handled.  A  highly  paid  manager  is  not  required.  Some 
teller  or  ledger  clerk  will  be  assigned  to  the  post  at  an 
increase  over  his  previous  salary.  He  will  be  given  a 
junior,  suitable  premises  will  be  rented  or  provided,  and 
the  bank  is  ready  to  begin  business.  It  is  to  be  expected 
that  all  the  local  business  men  will  avail  themselves  im- 
mediately of  its  facilities.  They  will  be  trained  to  de- 

100 


A    HYPOTHETICAL    BRANCH 

posit  their  receipts  and  to  pay  by 'checks  oh  the  tank. 
Then  there  will  be  a  number  of  farmers  and  village  house- 
holders who  will  take  the  first  opportunity  of  placing 
their  cash  at  interest  in  an  institution  clearly  deserving 
their  confidence,  and  thus  relieve  themselves  of  the 
anxieties  attendant  upon  hoarding.  From  bureau  draw- 
ers, from  hiding-places  and  improvised  safes,  from  pocket- 
books  and  wallets,  would  come  a  steady  stream  of  deposits. 
In  a  couple  of  months  even  a  very  small  place  of  this 
description  in  the  East  might  furnish  $40,000  or  $50,000 
of  deposits,  and  thereafter  the  amount  should  tend  to 
increase  steadily.  In  a  couple  of  years  the  bank  might 
have  $140,000  on  deposit  and  perhaps  $25,000  under 
discount.  Though  the  branch  is  intended  primarily  as 
a  feeder  for  other  discounting  branches,  there  is  no  at- 
tempt whatever  made  to  keep  down  the  loans.  On  the 
contrary,  the  local  manager  tries  to  develop  the  loans  to 
the  full  capacity  of  the  district.  He  does  so  because  the 
more  he  can  increase  his  good  loans  the  more  profitable 
will  his  branch  become,  and  the  higher  will  he  stand  in 
the  estimation  of  his  general  manager.  For  small  loans 
made  to  the  townspeople  or  the  farmers  in  this  place  the 
bank  will  get  a  higher  rate  of  interest  than  it  gets  from 
the  wealthy  manufacturers  at  the  other  branch.  There- 
fore, the  manager  lends  a  willing  ear  whenever  he  is 
approached  by  any  customer  or  resident  whom  he  knows 
to  be  worthy  and  responsible  and  who  wishes  to  dis- 
count satisfactory  paper.  Reliable  farmers  who  wish  to 
pay  their  hired  help,  to  pay  cash  at  the  stores,  or  purchase 
implements,  etc.,  before  they  have  received  payment  for 
the  season's  crops;  local  butchers  and  live-stock  buyers, 
contractors  and  builders,  grain  buyers  and  dealers  in  the 
produce  of  the  locality,  find  in  the  branch  a  steady  ally 
whose  assistance  can  be  depended  upon  in  any  weather 
so  long  as  they  themselves  keep  their  credit  good;  and 
the  local  merchants  find  that  when  they  convert  the  book 
debts  owed  them  by  good  farmers  and  by  good  citizens 

101 


,r  .A   JR.ATI.ONA.L    BANKING    SYSTEM 

into  notes  the  bank  will  discount  them,  and  that  the 
proceeds  of  the  discounts  permit  advantageous  buying 
of  fresh  goods  for  cash,  or  an  enlargement  and  improve- 
ment of  stocks  on  hand  without  a  further  investment  of 
capital. 

SENDING  AWAY  THE  SURPLUS  DEPOSITS 

But,  in  spite  of  all  the  efforts  of  the  local  manager  to 
find  good  borrowing  customers,  it  will  likely  happen  that 
the  growth  of  the  deposits  far  exceeds  the  development 
of  the  loans  and  discounts,  and  that  the  bank  has  an  in- 
creasing amount  of  the  local  funds  available  for  use  in 
other  places.  Here  is  encountered  one  of  the  chief  argu- 
ments used  by  the  champions  of  the  single-office  banks 
in  their  assaults  upon  the  branch  idea.  They  brand  it  as 
almost  a  crime  to  collect  the  deposit  fund  of  a  locality 
through  the  agency  of  a  branch  bank  and  then  to  lend 
it  in  a  different  section  of  the  country.  "The  inhabi- 
tants of  a  locality  served  by  a  bank  of  this  description," 
so  they  argue,  "are  deprived  of  the  use  of  their  own 
money,  which,  instead  of  being  used  to  build  up  the  home 
village,  is  applied  to  the  upbuilding  of  distant  towns  and 
cities."  I  think,  however,  that  a  great  many  of  my 
readers  who  have  patiently  followed  me  thus  far  will 
agree  with  me,  on  considering  the  matter,  that  it  is  absurd 
to  say  that  the  village  here  described  is  injured  through 
the  operations  of  the  Bank  of  Massachusetts'  branch. 
On  the  contrary,  the  people  of  the  locality  derive  a  num- 
ber of  important  benefits  from  the  operation  of  the 
branch  which  they  would  never  have  gained  if  their 
country  were  served  exclusively  by  single-office  banks. 
But  for  the  branch  system  the  place  probably  could  never 
hope  to  have  a  bank  at  all.  The  capital  which  the  branch 
collects  and  sends  away  lies  sterile.  It  is  kept  in  iron 
safes,  in  bureau  drawers,  old  stoves,  under  rag  carpets, 
and  in  people's  pockets.  Surplus  funds,  or  other  funds 
accumulated  for  special  purposes,  which  are  carried  in 

102 


A    HYPOTHETICAL    BRANCH    BANK 

that  fashion  are  of  little  use  to  anybody  or  any  place, 
least  of  all  to  the  place  to  which  they  belong.  A  branch 
bank  can  live  there  because  it  operates  more  economically 
than  an  independent  bank,  and  because  a  very  small  net 
profit  on  the  operations  will  be  satisfactory  to  its  man- 
agers. Nay,  the  branch  taken  by  itself  need  not  give  a 
profit  at  all.  Its  operations  are  considered  in  conjunction 
with  those  of  others.  Thus  it  may  happen  that  four 
branches,  each  supplying  $100,000  for  use  of  other 
branches,  will  be  bracketed  with  another  branch  which 
is  using  $400,000  of  the  funds  of  other  branches.  The 
net  result  from  the  combination  of  the  five  branches  will, 
perhaps,  be  an  annual  profit,  after  paying  all  expenses, 
of,  perhaps,  $2,000  per  year,  and  they  not  using  one  cent 
of  the  bank's  capital.  This  will,  perhaps,  show  that 
branch  banks  will  penetrate  into  much  smaller  places 
than  can  the  independent  banks.  The  thousands  of 
places  which  possess  no  banking  facilities  at  all,  or  facil- 
ities of  the  most  wretched  description,  would  gain  facil- 
ities of  a  superior  kind  in  a  short  time  if  a  proper  system 
of  branch  banking,  free  from  unreasonable  restrictions, 
were  inaugurated.  Think  you  the  people  of  any  of  those 
little  places,  when  they  learned  that  they  were  to  have 
a  branch  of  some  great  banking  institution,  would  con- 
sider that  they  and  their  locality  were  in  any  way  en- 
dangered or  imperilled  thereby?  Not  at  all.  Their  big 
bank  would  be  their  chief  boast;  and  their  local  paper, 
if  they  had  a  local  paper,  would  never  weary  of  referring 
to  it  as  an  evidence  of  the  confidence  entertained  by  the 
financial  powers  in  the  future  of  the  locality.  At  least 
that  is  how  all  the  little  places  in  Canada  take  it  when 
they  acquire  branches  of  good  banks. 

A  $5,000,000  BANK  IN  A  VILLAGE  WITH  POPULATION  OP 
ONE  HUNDRED 

I  am  penning  this  chapter  at  a  little  country  place  in 
the  Niagara  Peninsula  in  the  Province  of  Ontario.     The 

103 


A    RATIONAL    BANKING    SYSTEM 

population  is,  perhaps,  one  hundred  and  fifty  souls.  It 
has  no  bank.  A  mile  and  a  half  to  the  east  lies  another 
village  with  a  population  of  about  five  hundred.  Here 
one  of  the  strong  Canadian  banks  has  a  branch.  Last 
year,  the  third  year  of  its  branch  establishment,  the  bank 
erected  a  building  to  serve  for  its  office  and  for  the  resi- 
dence of  the  manager,  which  must  have  cost  $6,000  or 
$7,000,  and  is,  apart  from  the  churches,  the  show  place 
of  the  village.  Then,  two  and  a  half  miles  west,  is  another 
village  with  about  three  hundred  and  fifty  population. 
This  has  a  branch  of  a  bank  with  a  capital  of  over  $3,000,- 
ooo.  A  few  days  ago  while  driving  over  the  Peninsula 
we  went  through  a  tiny  hamlet  which  could  not  have  had 
more  than  one  hundred  population.  The  only  business 
places  I  could  see  were  a  hotel,  a  store,  and  the  ware- 
house of  an  agricultural  implement  dealer.  I  knew  it 
had  a  bank,  but  did  not  at  first  see  the  office.  "Where  is 
the  bank?"  I  asked  my  companion.  "There  you  are," 
he  said,  pointing  with  his  whip  to  a  very  diminutive  house 
farther  along  the  road.  But,  mean  though  it  looked, 
that  building  was  dignified  with  the  name  of  one  of 
Ontario's  powerful  banks — an  institution  possessing  more 
than  $50,000,000  of  assets.  After  the  bank's  name  ap- 
peared the  legend,  "Capital  $5,000,000,  Reserve  Fund 
$5,000,000.  Open  Tuesdays  and  Fridays."  This  is 
what  is  known  in  Canada  as  a_subragency.  One  of  the 
larger  branches  of  that  bank  in  this  district  sends  two 
men  on  Tuesdays  and  Fridays  of  every  week  to  the  sub- 
agency.  They  take  a  supply  of  cash  with  them,  and 
receive  deposits,  make  loans,  and  cash  checks  for  the 
inhabitants;  and  then  take  the  discounted  notes,  the  cash, 
and  cash  items  back  with  them  to  the  parent  branch.  In 
this  way  the  branch  banks  of  Canada  get  close  to  the 
people  of  the  rural  districts,  and  the  rural  districts  de- 
rive nothing  but  benefit  from  the  connection.  The  people 
living  in  lonely  farm-houses  in  Canada  are  not  forced  to 
keep  sums  of  cash  in  hand  because  of  the  lack  of  con- 

104 


A    HYPOTHETICAL    BRANCH    BANK 

venient  banking  depositories.  Within  easy  distance  there 
is  sure  to  be  a  branch  of  some  bank  in  which  the  farmers 
have  implicit  confidence.  And  into  the  branch  their 
moneys  go  at  once.  The  general  habit  of  depositing,  and 
the  general  confidence  of  all  classes  of  the  public  in  the 
strength  of  the  banks,  have  a  tendency  to  lessen  burglaries 
— for  the  burglars,  as  a  class,  have  come  to  know  that 
there  is  but  a  poor  chance  of  finding  any  cash  even  in  the 
houses  of  the  well-to-do  farmers. 

ANOTHER  FIELD  IN  WHICH  THE  LOCAL  BANKS  ARE  WEAK 

To  return  to  the  affairs  of  the  Bank  of  Massachusetts, 
I  might  observe  that  the  bank,  in  searching  for  depos- 
its to  offset  the  heavy  loans  of  certain  of  its  branches, 
would  perhaps  establish  some  offices  in  another  field 
which  is  but  scantily  served  by  the  present  system  of 
local  banks.  Boston  itself  and  the  other  large  United 
States  cities  comprise  that  field.  To  illustrate  my  mean- 
ing the  following  is  submitted:  Early  in  1908  the 
National  Shawmut  Bank  of  Boston  absorbed  the  National 
Bank  of  the  Republic.  That  transaction  reduced  the 
number  of  national  banks  in  Boston  to  twenty-four.  In 
the  year  preceding  that  in  which  it  was  swallowed  into 
the  Shawmut  the  National  Bank  of  the  Republic  had  it- 
self absorbed  the  Freeman's  National.  Thus,  where  there 
were  three  banking  offices  there  is  now  but  one.  The 
Shawmut  has  grown  larger  and  stronger,  but  two  banking 
offices  in  Boston  have  disappeared  in  bringing  it  to  pass. 

BOSTON'S  BANKING  FACILITIES 

There  were  in  Boston  in  1898  fifty-seven  national 
banks;  in  1903  the  number  had  fallen  to  thirty-eight. 
Then,  in  1908,  it  had  fallen  to  twenty-four — a  net  reduc- 
tion in  ten  years  of  thirty-three,  or  more  than  50  per 
cent.  During  1909  the  number  of  national  banks  was 

105 


A    RATIONAL    BANKING    SYSTEM 

further  reduced  to  twenty-three.  Two  banks  went  into 
liquidation,  and  one  new  institution  was  formed.  The 
reduction  has  occurred  as  a  result  of  consolidations, 
liquidations,  and  failures.  If,  instead  of  taking  the 
national  banks,  the  member  banks  of  the  Boston  Clearing- 
House  are  taken,  the  reduction  in  banking  facilities  is 
seen  to  be  even  more  startling — for  in  1898  there  were 
\fifty-three,  and  in  1908  there  were  but  nineteen. 
^  Economy  of  operation  has  been  one  of  the  chief  ob- 
jects aimed  at  in  the  mergers.  It  has  unquestionably 
been  attained,  since  in  1898  the  fifty-seven  national  banks, 
on  their  aggregate  capital  of  $49,650,000,  paid  an  aver- 
age dividend  of  2.3  per  cent.,  while  the  twenty-three 
national  banks  in  1909  paid  an  average  dividend  of  7.2 
per  cent,  on  an  aggregate  capital  of  $23,300,000.  An 
official  of  one  of  the  oldest  banks  in  Boston,  commenting 
on  these  figures,  acknowledged  that  the  tendency  of  the 
banks  to  consolidate  had  brought  inconvenience  and 
hardship  to  retail  business  interests  especially.  Refer- 
ring to  one  of  the  recent  mergers  he  said:  "I  believe  the 
effect  of  the  consolidation  is  bad  so  far  as  the  mercantile 
interests  are  concerned.  The  few  banks  remaining  are 
larger  than  formerly,  and  are  less  willing  to  give  atten- 
tion to  the  small  merchant,  who  is  finding  it  increasingly 
hard  to  borrow  from  the  banks.  There  are,  of  course, 
large  economies  effected,  expenses  greatly  reduced,  and 
increased  dividends  paid  to  stockholders,  but  it  is  hard 
sledding  for  the  little  fellows.  To  be  sure  the  trust  com- 
panies are  of  late  years  doing  more  or  less  of  a  banking 
business;  but  in  Boston  I  should  say  that  one-half  of 
them  will  not  loan  to  depositors  except  on  collateral." 

CONDITIONS  IN  OTHER  CITIES 

These  same  conditions  are  more  or  less  in  evidence  in 
the  other  large  cities.  In  Chicago,  for  example,  as  the 
New  York  Financier  pointed  out,  there  are  a  great  many 

1 06 


A    HYPOTHETICAL    BRANCH    BANK 

small  merchants  and  business  men  who  are  obliged  to 
travel  from  two  to  six  miles  in  person  or  by  messenger  to 
make  a  deposit.  The  movement  to  consolidate  is  alto- 
gether a  natural  one,  and  the  banks  cannot  in  fairness 
be  blamed,  because  it  results  in  a  steady  shrinkage  in  the 
facilities  extended  by  them  to  the  public.  Banks  are 
commercial  organizations,  and  for  the  managers  of  the 
respective  institutions  to  seek  to  increase  their  profits, 
their  strength,  and  solidity  by  lawful  means  is  entirely 
right.  The  fault  is  with  the  system  of  banking  which 
makes  it  well-nigh  impossible  to  effect  the  desired  finan- 
cial strengthening  and  increase  of  earning  capacity 
through  consolidation  without  closing  many  banking 
offices  that  had  been  supplying  much -needed  facilities 
to  certain  urban  districts.  I  am  aware  that  a  few  banks 
do  operate  branches  in  certain  cities,  but  the  conditions 
under  which  a  branch  may  be  operated,  in  those  states 
that  permit  them  to  exist,  are  so  onerous  as  to  amount 
almost  to  prohibition.  If  the  conditions  were  such  as  to 
allow  the  city  bank  profitably  and  conveniently  to  oper- 
ate an  absorbed  bank  as  a  branch,  doubtless  it  would 
gladly  do  so,  and  the  inhabitants  of  the  cities  would 
continue  to  have  the  benefit  of  banking  facilities  they 
had  enjoyed  before  the  consolidation  took  place. 

How  THE  CANADIAN  CITIES  ARE  SERVED 

Contrast  the  conditions  prevailing  in  Boston  with 
those  found  in  the  principal  Canadian  cities.  In  Novem- 
ber, 1909,  there  were  in  Toronto  one  hundred  and  fifteen 
branch  banks;  in  Montreal  there  were  eighty-three;  in 
Winnipeg  forty,  and  in  Vancouver  thirty-five.  In 
Toronto  one  important  bank  had  no  less  than  seventeen 
branch  offices;  another  had  twelve,  and  another  ten; 
while  in  Montreal  one  bank  had  thirteen  branches;  an- 
other eleven,  and  a  third  had  ten.  In  all  the  Canadian 
cities  the  number  of  banking  offices  is  constantly  increas- 

8  107 


A    RATIONAL    BANKING    SYSTEM 

ing,  notwithstanding  that  the  number  of  banks  in  the 
Dominion  tends  to  decrease.  Because  the  establishment 
of  branches  is  left  free  and  unrestricted,  and  is  not  un- 
duly taxed,  the  resident  of  every  part  of  a  Canadian  city 
has  a  good  strong  bank  within  a  couple  of  blocks  of  his 
door.  In  the  retail  district  the  branch  offices  are  thickly 
scattered,  also  in  the  residential  districts  and  in  the  fac- 
tory districts.  They  extend  even  into  the  suburbs.  Thus, 
through  the  working  of  the  branch  system,  nearly  every 
Canadian  city  has  more  banking  offices  than  an  American 
city  twice  or  three  times  its  size  will  have;  and  all  the 
residents  benefit  therefrom. 

BANK  AMALGAMATIONS  IN  CANADA  Do  NOT  LESSEN  THE 
FACILITIES 

These  urban  branches  are,  of  course,  like  the  country 
branches,  open  to  discount  all  the  good  paper  offered 
them.  But,  except  those  located  in  the  midst  of  the 
factories,  they  usually  have  a  considerable  excess  of  de- 
posits. They  are  used  most  extensively  by  business 
men,  professional  men,  by  housewives  and  their  daughters 
for  personal  accounts.  The  owners  of  the  stores  and 
business  establishments  also  find  them  a  great  conven- 
ience and  a  source  of  considerable  profit.  Banking 
amalgamations  and  consolidations  are  as  plentiful,  rela- 
tively, in  Canada  as  in  the  States,  but,  because  Canada 
has  the  branch  system,  consolidation  there  is  not  at- 
tended by  a  withdrawal  of  banking  facilities  from  the 
public. 

A  COMPARISON  OF  FACILITIES 

In  order  to  show  the  value  of  the  facilities  provided 
by  the  Canadian  branch  banks  to  the  residents  of  the 
cities  and  larger  towns  I  have  compiled  a  list  of  the  prin- 
cipal cities  in  the  United  States  and  Canada,  and  a  com- 
parison of  the  number  of  inhabitants  per  banking  office. 

108 


A    HYPOTHETICAL    BRANCH    BANK 

The  statistics  for  the  United  States  cities  are  taken  from 
the  Rand-McNally  Bankers'  Directory,  1908,  and  for  the 
Canadian  cities  the  number  of  banking  offices  from 
Houston's  Bank  Directory  for  November,  1909,  and  the 
population  from  Bradstreet's  Reference  Book  for  1909. 
The  difference  in  dates  is  not  unfair  to  the  American 
cities,  inasmuch  as  in  some  cities  the  number  of  banks 
has  since  decreased  through  amalgamation  or  liquida- 
tion (Boston  is  one  example),  while  the  population  has 
increased,  and  in  others  any  increase  in  the  number  of 
banking  offices  would  be  accompanied  by  an  increase  of 
population  perhaps  to  such  an  extent  as  to  leave  the  num- 
ber of  inhabitants  per  banking  office  at  about  the  same 
figure.  I  would  point  out,  also,  that  I  have  favored  the 
American  cities  through  counting  all  trust  companies  as 
banks,  along  with  state  banks,  savings-banks,  national 
banks,  etc.,  while  in  the  Canadian  record  I  have  included 
only  the  chartered  banks,  and  in  Montreal  the  Montreal 
City  and  District  Savings-Bank.  In  the  Rand- McN ally 
Directory,  at  the  end  of  the  list  of  banks  in  each  large 
city,  appears  a  list  of  brokers,  bankers,  and  investment 
concerns.  These  I  have  not  included. 

BANKING  OFFICES  AND  POPULATION 

UNITED    STATES   CITIES 

Inhabitants 
Population  Bank  Offices  per  Bank 

Chicago,  2,300,500  84 

Philadelphia,  1,293,697  108 

Boston,  595,38o  65 

St.  Louis,  575,238  53 

Baltimore,  5°8,957  53 

Cleveland,  381,768  43 

Buffalo,  376,587  18 

San  Francisco,  342,782  56 

Cincinnati,  325,900  41 

Pittsburg,  321,616  *96 

Detroit,  317,591  21 

New  Orleans,  287,104  24 

Carried  forward,    7,627,120  662  143,150 

*  Includes  20  trust  companies  and  32  savings  and  trust  companies. 


A    RATIONAL    BANKING    SYSTEM 


UNITED  STATES  CITIES — Continued 


Population 

Bank  Offices 

Brought  forward 
Milwaukee, 

,  7,627,120 
285,3*5 

662 
18 

Minneapolis, 

261,974 

24 

Washington, 

218,196 

32 

Louisville, 

204,731 

23 

St.Paul, 

197,023 

Providence, 

175,597 

21 

Indianapolis, 

169,164 

JO 

Kansas  City, 
Denver, 

163,752 
133,859 

22 

18 

Columbus,  Ohio, 

125,560 

28 

Omaha, 

I02,555 

7 

Memphis, 

102,320 

21 

Portland,  Ore., 

90,426 

20 

Atlanta, 

89,872 

15 

Richmond, 

85,050 

21 

Seattle, 

80,671 

26 

Des  Moines, 

62,139 

21 

Charleston, 

55,807 

14 

Savannah, 

54,424 

12 

Salt  Lake  City, 

53,53* 

*3 

Spokane, 

47,006 

*4 

Dallas, 

42,638 

II 

10,428,730 

1,075 

CANADIAN 

CITIES 

Population 

Bank  Offices 

Montreal, 

*400,ooo 

83 

Toronto, 

328,911 

Winnipeg, 

130,000 

40 

Ottawa, 

80,284 

3° 

Vancouver, 

80,000 

35 

Quebec, 

68,840 

22 

Hamilton, 

62,000 

22 

Halifax, 

50,000 

IO 

London, 

48,000 

16 

St.  John,  N.  B., 

40,711 

13 

Victoria, 

35,ooo 

8 

Calgary, 

29,265 

16 

Edmonton, 

22,500 

14 

Fort  William, 

18,000 

IO 

Brandon, 

10,409 

9 

Regina, 

10,000 

IO 

Inhabitants 
per  Bank 

4,800 
2,8oo 
3,300 
2,700 
2,300 
3,100 
2,800 
5,000 
3,000 
3,100 
4,4oo 
i, 800 
i, 600 
i, 800 

1,200 

1,000 


1,413,920  453  3»IO° 

*  In  Montreal's  case  I  have  taken  the  estimated  population  of  the  suburbs  as 
well  as  of  the  city  proper,  because  the  83  banking  offices  include  branches  in  the 
suburbs. 

110 


A    HYPOTHETICAL    BRANCH    BANK 
BETTER  FACILITIES  FOR  CITY  RESIDENTS 

The  foregoing  illustration  explains  what  further  steps 
the  Bank  of  Massachusetts  would  take  in  its  search  for 
deposits  to  supply  the  capital  needed  by  its  discounting 
branches.  If  the  laws  and  other  conditions  permitted  it 
to  do  so  it  would  establish  perhaps  a  score,  perhaps  two 
score,  branches  in  Boston  city.  At  every  point  where 
deposits  might  be  secured,  or  a  loan  business  done,  in  the 
retail  districts,  in  the  factory  districts,  in  the  residential 
districts,  and  in  the  suburbs,  its  handsome  branch  build- 
ings would  be  found.  Perhaps  twenty  branches  might 
supply,  on  the  average,  $250,000  or  $300,000  each  to 
the  parent  office  (in  Montreal  and  Toronto  some  of  these 
urban  branches  have  very  large  deposits). 

Now,  has  any  reader  the  hardihood  to  say  that  the 
establishment  of  these  offices  in  sections  of  the  city  which 
had  previously  no  banking  facilities  would  do  the  locali- 
ties an  injury?  If  the  banks  were  properly  constituted 
the  opening  of  the  branches  would  be  regarded,  in  many 
humble  homes  and  in  many  humble  business  places,  as 
an  unmixed  blessing. 

SMALL  LOCAL  BANKS  ENCOURAGE  MONOPOLIES 

Before  resuming  the  narrative  of  the  operations  and 
development  of  the  branch  in  X  I  wish  to  draw  attention 
to  a  peculiarity  of  the  banking  practice  and  business  in 
the  United  States  which  has  important  economic  effects. 
Doubtless  it  will  come  as  a  surprise  to  many  readers  to  be 
told  that  the  existing  system  of  isolated  small  banks 
tends  in  any  way  to  encourage  the  creation  of  monopolies 
and  trusts.  But  it  is  quite  easy  to  prove  that  in  several 
respects  the  system  has  tended  to  bring  about  a  set  of 
conditions  favorable  to  the  creation  of  combinations 
operating  with  huge  capital,  and  decidedly  unfavorable 
to  the  man  with  moderate  capital  who  desires  to  embark 

in 


A    RATIONAL    BANKING    SYSTEM 

independently   in   manufacturing,    or   in    some   line   of 
mercantile  business. 

THE  EXAMPLE  OF  NEWFOUNDLAND 

There  is  in  North  America  one  interesting  example  of  a 
people  experiencing  a  change  from  the  local  to  the  branch 
banks.  It  is  to  be  found  in  the  British  colony  of  New- 
foundland. From  about  1856  the  business  of  that  island 
was  in  the  hands  of  two  local  banks — the  Union  Bank  of 
Newfoundland  and  the  Commercial  Bank  of  Newfound- 
land. These  banks  both  failed  on  the  same  day — De- 
cember 10,  1894.  For  a  dark  and  gloomy  period  of  two 
weeks — from  the  loth  to  the  24th  of  December — the 
Newfoundlanders  had  no  banking  facilities  and  prac- 
tically no  circulating  medium.  They  suffered  terrible 
losses  as  a  result.  On  the  24th  the  Bank  of  Nova  Scotia 
established  a  branch  at  St.  John's,  and  was  followed,  a 
few  days  afterward,  by  the  Bank  of  Montreal,  and  in  six 
months  by  the  Merchants'  Bank  of  Halifax — now  the 
Royal  Bank  of  Canada. 

A  circumstantial  account  of  the  affairs  leading  up  to 
the  failures  and  the  succeeding  events  has  been  con- 
tributed to  the  Nova  Scot-ian,  March,  1909,  by  Mr.  W.  W. 
Watson,  the  manager  of  the  Bank  of  Nova  Scotia,  who 
opened  the  St.  John's  branch,  and  who  took  an  ac- 
tive part,  along  with  the  managers  of  the  other  two  banks, 
in  rebuilding  the  shattered  finances  of  the  colony.  The 
bank  failures  were  due  to  a  cause  that  figures  prominently 
in  the  record  of  failures  of  banks  of  the  local  type — large 
loans  to  enterprises  in  which  the  local  directors  were 
interested.  Mr.  Watson  explains,  too,  that  the  local 
interests  controlling  the  banks  kept  the  benefits  jealously 
within  their  own  clique  or  set.  Traders  and  customers 
outside  of  that  had  little  chance  of  getting  accommoda- 
tion. When  the  Canadian  banks  went  into  Newfound- 
land they  reconstructed  the  colonial  finances,  provided 

112 


A    HYPOTHETICAL    BRANCH    BANK 

an  adequate  supply  of  currency  in  the  form  of  their  own 
notes,  lent  money  to  the  Government,  and  extended 
accommodation  to  all  worthy  borrowers  without  regard 
to  whether  they  belonged  to  any  particular  clique  or 
party.  The  5/.  John's  Trade  Review  in  December,  1907, 
published  the  following  description  of  the  change  effected : 
"The  thirteen  years  that  have  elapsed  since  the  bank 
crash  have  wrought  many  changes  in  our  commercial  and 
social  life,  and  on  the  whole  we  have  progressed.  Three 
factors  make  up  the  sum  of  our  material  betterment — 
namely:  bountiful  sea  harvests,  increased  labor  in  mine 
and  forest,  and  the  introduction  of  the  Canadian  banks. 
Prior  to  the  advent  of  these  banks  half  a  dozen  men 
held  the  business  of  the  country  in  the  hollow  of  their 
hands,  and  woe  to  the  unfortunate  wight  who  endeavored 
to  butt  into  the  ring.  But  with  the  new  order  there  was 
a  fair  field  opened  to  every  young  business  man  with 
small  capital  and  reputable  name,  and  hundreds  availed 
themselves  of  the  opportunity.  This  not  only  led  to 
keener  competition,  and  consequently  lower  prices  for 
the  consumer,  but  it  also  led  to  a  quickening  of  the 
business  pace  all  round." 

THE  LARGE  CORPORATIONS  ARE  NOT  INCONVENIENCED 

Possibly  the  reader  will  find  in  this  short  sketch  a 
strong  hint  as  to  some  ways  in  which  local  banks  en- 
courage monopolies.  Pursuing  the  subject  to  a  more 
particular  and  precise  definition,  here  is  another  way  in 
which  they  tend,  innocently  and  indirectly,  to  bring  about 
the  same  undesirable  result.  It  has  been  explained  that 
the  manufacturer  or  merchant  in  the  United  States  who 
wishes  to  borrow  a  large  amount,  and  who  does  not  con- 
trol a  banking  institution  or  a  considerable  interest  in 
one,  is  obliged  usually  to  float  his  paper  through  note- 
brokers  in  the  principal  cities,  or  to  apply  to  large  banks 
in  those  cities. 

"3 


A    RATIONAL    BANKING    SYSTEM 

When  a  great  railway  company,  the  operations  and 
financial  position  of  which  are  well  known  to  bankers 
and  investors  in  every  part  of  the  country,  wishes, 
through  its  fiscal  agents,  to  place  its  bond  or  short-term 
note  issues  on  the  market  while  monetary  conditions  are 
normal,  it  can  do  so  without  difficulty  or  trouble.  Simi- 
larly, when  a  large  industrial  or  mercantile  company, 
possessing  a  good  reputation  everywhere  for  financial 
strength,  essays  to  do  the  same  thing,  bankers  and  in- 
vestors in  all  the  states  have  confidence  that  the  obli- 
gations are  good,  and  buy  them  freely  when  in  funds. 
As  we  descend  the  scale,  however,  and  come  eventually 
to  manufacturers  and  merchants  operating  in  a  smaller 
way,  and  not  so  well  known  to  the  investing  classes,  it 
becomes  a  more  difficult  matter  for  them  to  get  the  credits 
needed  for  carrying  on  business,  though  they  may,  in 
many  instances,  be  quite  as  worthy  of  financial  assist- 
ance, and  quite  as  sound  and  safe  for  their  requirements, 
as  are  their  larger  competitors  and  fellows.  It  can  be 
seen,  also,  that  after  a  certain  point  is  reached  one  comes 
to  a  class  of  merchants  and  manufacturers,  with  only  a 
local  name  and  reputation,  who  are  not  big  enough  to 
command  the  support  of  this  outside  credit  market. 
They  are  thus  confined  to  their  local  banks,  which,  as 
already  explained,  are  prevented  by  law  and  by  regard 
for  banking  principles  and  their  own  safety,  from  ad- 
vancing beyond  certain  small  sums. 

THE  SMALLER  CONCERNS  ARE  HAMPERED 

Now  one  may  see  how  these  conditions  tend  toward 
monopolies.  A  large,  strong  concern  can  easily  get  all 
the  money  it  wants.  The  smaller,  less-known  concern 
gets  credit  less  easily,  and  has  to  content  itself  with  less 
than  it  can  profitably  use.  In  other  words,  the  opera- 
tions of  the  large  concerns  are  carried  on  without  diffi- 
culty or  hindrance;  those  of  the  smaller  concerns,  the 

114 


A    HYPOTHETICAL    BRANCH    BANK 

requirements  of  which  are  beyond  the  capacity  of  their 
local  banks  to  finance,  are  hindered  at  every  turn.  As 
already  mentioned  in  the  matter  of  the  banking  con- 
solidations, there  is  no  just  ground  for  complaining  of 
the  conduct  of  the  individual  banks.  It  is  perfectly  right 
and  proper  for  each  particular  bank  to  prefer  to  buy  the 
easily  marketable  paper  of  a  strong  corporation  rather 
than  that  of  a  little-known  manufacturer  operating  in 
some  small  far-away  town.  That  is  correct  banking; 
and  the  individual  bankers  are  not  to  be  blamed  if  the 
small  borrower  fails  to  get  the  capital  he  needs.  But  it 
counts  in  the  indictment  of  the  banking  system,  for  it  is 
clearly  a  defect  of  the  system  if  worthy  men  with  mod- 
erate capital  cannot  comfortably  get  the  accommodation 
necessary  for  carrying  on  their  business. 

BRANCH    BANKS    SUPPORT    BOTH    LARGE    AND    SMALL 
BORROWERS 

I  have  explained  in  the  preceding  chapter  what  the 
branch  banks  would  do  for  these  smaller  manufacturers. 
Under  the  branch  system  the  great  bank,  with  abun- 
dance of  capital  and  credit  to  dispense,  establishes  itself 
at  the  very  doors  of  these  factories  and  mercantile  estab- 
lishments. It  makes  it  a  point  to  become  thoroughly 
acquainted  with  the  affairs,  resources,  reputation,  and 
history  of  every  borrower  of  the  kind ;  and  its  officers  are 
just  as  ready  to  fill  the  full  requirement  of  a  man  who 
wants  and  is  entitled  to  $50,000  as  they  are  to  meet  the 
wishes  of  a  borrower  who  asks  for  one  or  two  millions. 

It  is  quite  possible  that  the  oppressive  combinations 
which  overcharge  consumers  because  of  the  monopoly 
they  enjoy  (in  some  part  through  possession  of  enormous 
cash  funds  or  credit  resources)  would  experience  a  much 
more  vigorous  competition  if  the  able  men  throughout 
the  country  possessing  a  moderate  capital  and  a  good 
reputation  could  rely  upon  the  support  of  good  banks 


A    RATIONAL    BANKING    SYSTEM 

free  from  trust  domination.  It  would  be  reasonable 
enough  to  hope  that  from  this  cause  alone  the  ad- 
vent of  branch  banks  would  bring  back  competition  in 
a  number  of  trades  and  businesses  where  it  now  appears 
to  be  extinct.  If  they  did  so  the  fact  would  be  of  great 
benefit  to  the  whole  country. 

THE  DOMESTIC  BILL  OF  EXCHANGE 

There  is  another  respect,  closely  allied  to  the  fore- 
going, in  which  the  present  system  makes  it  necessary 
for  a  business  man  engaged  in  distributing,  jobbing,  or 
manufacturing,  to  have  a  larger  capital  for  carrying  on 
his  operations  than  he  would  need  under  the  branch 
system,  and  which,  therefore,  works  for  the  benefit  of 
the  so-called  trusts.  When  I  commenced  my  study  of 
banking  conditions  in  the  United  States  several  years 
ago  I  was  struck  by  one  curious  fact:  From  what  I  can 
discover,  hardly  anywhere  in  the  United  States  is  there 
any  extensive  use,  so  far  as  internal  trade  is  concerned, 
of  the  commercial  bill  of  exchange  or  draft  drawn  by  the 
merchant  upon  his  debtor  as  a  means  of  effecting  col- 
lections and  minimizing  the  capital  requirement  for 
carrying  on  business.  There  appear  to  be  quite  a  num- 
ber of  sight  drafts,  but  they  are  not  commonly  discounted 
or  put  to  credit.  The  merchant  or  manufacturer  sends 
them  direct,  for  collection,  to  a  bank  in  the  drawee's 
town,  and  does  not  get  his  funds  till  the  drafts  are  paid 
and  the  correspondent  bank  remits.  Drafts  at  thirty 
days,  sixty  days,  three  and  four  months,  are  hardly  used 
at  all.  Apparently  the  well-nigh  universal  custom, 
when  a  business  man  sells  goods,  is  for  him  to  wait  for 
the  maturity  of  the  account  or  debt,  and  then  he  ex- 
pects to  receive  a  check.  If  the  check  is  not  forthcoming 
on  the  due  date,  he  may  then  draw  a  sight  draft  and  en- 
deavor to  get  it  paid.  In  some  sections  of  the  country 
these  drafts  are  regarded  by  the  drawees  as  offensive,  as 

116 


A    HYPOTHETICAL    BRANCH    BANK 

being,  in  fact,  next  door  to  a  lawyer's  letter.  This  is  a 
peculiar  state  of  affairs.  In  other  highly  civilized  coun-\ 
tries  the  inland  draft  or  commercial  bill  of  exchange  is  an] 
honorable  and  useful  instrument,  serving  a  very  valuable! 
purpose  in  economizing  the  use  of  capital  in  business. 

DISCOUNTING  TRADE  BILLS 

In  all  probability  the  drafts  have  fallen  out  of  use 
because  the  merchants  and  manufacturers  are  not  carried 
each  one  altogether  by  his  own  bank.  A  wholesale  mer- 
chant in  Montreal  who  ships  goods  all  over  the  Dominion 
will  have  a  line  of  credit  with  a  large  bank  amounting  to, 
perhaps,  $500,000.  When  he  applies  for  his  credit  the 
bank  says:  "We  want  commercial  paper  or  trade  bills. 
We  won't  make  a  direct  loan  to  you,  but  will  discount 
trade  paper."  This  attitude  of  the  bank  is  taken  because 
of  the  well-known  banking  principle  that  bona-fide  trade 
bills  are  better  security  than  accommodation  paper.  Such 
an  arrangement  is  better  for  the  merchant  too,  for,  though 
he  may  owe  the  bank  $500,000,  his  liability  is  but  in- 
direct, and  he  has  the  powerful  aid  of  the  system  of 
branches  in  effecting  collection  of  his  accounts.  So,  when 
he  ships  out  his  goods  he  allows  time  for  them  to  reach 
the  consignees,  then  sends  down  to  the  bank  a  batch  of 
drafts  drawn  on  his  debtors  in  all  parts  of  the  Dominion — 
at  sight,  thirty  and  sixty  days,  three  and  four  months — 
and  the  bank  discounts  the  whole  batch,  providing  the 
bills  are  on  good  parties.  In  this  process  the  merchant 
gets  his  capital  back  within  a  few  days  after  shipment  of 
goods.  He  repeats  the  operation  after  each  shipment. 
The  prompt  return  of  his  funds  operates  mightily  to  re- 
duce the  capital  requirement  of  his  business.  Under  the 
United  States  system  this  man  would  probably  have 
five  or  six  hundred  thousand  dollars  more  or  less  per- 
manently on  his  books,  a  large  part  of  it  being  beyond 
his  reach;  He  may  negotiate  direct  loans  of  from  $200,- 

117 


A    RATIONAL    BANKING    SYSTEM 

ooo  to  $300,000,  but  his  bank  will  force  him  to  carry  one- 
fifth  of  the  amount  at  credit  of  his  account;  and  he  must, 
therefore,  find  his  own  capital  for  carrying  the  book  debts, 
perhaps  to  the  extent  of  $300,000  or  more. 

BRANCH  BANKS  WOULD  REVIVE  THE  BILL  OF  EXCHANGE 

Here,  again,  is  seen  how  a  good  system  of  branch  banks 
devoted  to  commercial  banking  would  benefit  able  busi- 
ness men  with  small  or  moderate  capital.  It  is  quite 
reasonable  to  anticipate  that  once  that  type  of  branch 
bank  became  established  and  began  to  take  the  ac- 
counts of  the  merchants  and  manufacturers  the  latter 
would  begin  at  once  to  educate  their  debtors  to  the  use 
of  the  commercial  bill  of  exchange.  They  would  do  so 
because  of  the  insistence  of  their  bankers  that  they  be 
furnished  with  trade  paper  rather  than  accommodation 
billsu  Instead  of  going  forward  merely  as  a  collection  bill 
and  receiving,  perhaps,  contemptuous  treatment  at  the 
hands  of  the  drawee  and  of  the  correspondent  bank  re- 
ceiving it,  the  instrument  would  be  discounted  at  once 
and  forwarded  to  a  branch  or  to  a  correspondent  that 
would  accord  it  the  respect  properly  belonging  to  it.  The 
more  general  use  of  these  instruments  in  the  United  States 
would  unquestionably  effect  a  vast  economy  of  capital, 
and,  as  before  said,  should  stimulate  indirectly  a  healthier 
competition  in  many  lines  of  trade  and  industry. 

EDUCATION  OF  THE  BANK'S    CUSTOMERS 

We  may  now  understand  how  the  manager  of  the 
Bank  of  Massachusetts'  branch  in  X  would  begin  at  once 
to  educate  his  manufacturing  customers  to  draw  upon 
their  debtors  and  discount  the  drafts  instead  of  simply 
sitting  down  and  waiting  for  their  checks.  As  it  would 
require  something  of  an  economic  revolution  to  bring 
about  the  change  in  practice,  no  doubt  it  would  proceed 

118 


A    HYPOTHETICAL    BRANCH    BANK 

but  slowly;  but  when  the  manufacturing  classes  got  to 
understand  thoroughly  that  ample  credits  were  at  their 
disposal  on  their  providing  trade  bills,  accepted  or  made 
by  their  debtors,  they  could  probably  be  depended  upon 
to  bring  the  debtors  into  the  frame  of  mind  necessary  for 
the  acceptance  of  drafts. 

The  work  connected  with  the  large  lines  of  credit  given 
to  the  X  manufacturers  would  necessitate  an  addition  to 
the  staff  of  the  X  branch.  Quite  probably  it  would  now 
need  a  staff  little  inferior  in  point  of  numbers  to  that  car- 
ried by  the  local  bank.  With  the  success  of  the  branch 
thus  assured,  the  manager,  if  he  were  wise,  would  play 
a  waiting  game.  Unquestionably  a  number  of  citizens 
would  be  deeply  impressed  by  the  fact  that  the  branch 
bank  was  carrying  the  whole  accounts  of  those  large 
manufacturing  establishments,  and  by  the  other  fact  that 
it  was  open  to  do  all  the  discounting  business  that  offered. 
The  strength  and  security  thereby  suggested  would  not 
be  lost  upon  the  depositing  classes.  Those  impressive 
figures  displayed  day  after  day  upon  the  window  screens 
would  have  their  certain  force  in  attracting  deposits. 
While  perhaps  the  body  of  depositors,  out  of  loyalty  to 
the  local  institution,  would  leave  their  balances  with  it, 
the  branch  would  get  a  share  of  the  new  accumulations; 
and  there  would  be  some  clients  of  the  older  bank  who 
would  consider  that  the  great  size  of  the  Boston  bank 
offered  them  better  security  for  their  money,  and  they 
would  place  that  consideration  before  everything  else. 
Of  course  the  savings  of  the  workingmen  employed  by 
the  manufacturing  industries  would  have  a  tendency  to 
gravitate  to  the  bank  at  which  the  factory  accounts  were 
carried. 


VII 

MOVEMENT  OF  FUNDS  TO  AND  FROM  NEW  YORK 

THE  EXTINCTION  OF  THE  LOCAL  BANKS 

HPHAT  the  United  States  will  ultimately  adopt  branch 
1  banking  I  have  every  confidence.  At  present  there 
are  only  a  few  who  desire  to  see  it  introduced;  but  as 
the  people  generally  get  a  better  idea  of  the  waste  and 
inefficiency  of  the  present  system,  the  impossibility  of 
reforming  it  or  of  making  its  units  cohere,  it  is  to  be  ex- 
pected that  first  the  sentiment  and  afterward  the  laws 
will  veer  to  an  attitude  more  favorable  to  a  different 
system.  The  chief  ground  on  which  I  base  this  expecta- 
tion is  concisely  expressed  in  an  address  given  before  the 
Pennsylvania  Bankers'  Association,  at  Bedford  Springs, 
in  September,  1909,  by  Hon.  Edward  B.  Vreeland.  Mr. 
Vreeland  said:  "I  believe  in  this  independent  system  of 
banks.  I  am  opposed  to  the  branch-bank  system.  The 
branch-bank  system  will  drive  any  other  system  with 
which  it  competes  out  of  existence.  The  establishment 
of  the  branch  system  in  the  United  States  would,  in  time, 
mean  the  extinction  of  the  small  independent  bank.  This 
has  invariably  been  its  history  wherever  put  into  opera- 
tion. In  France  there  are  to-day  only  three  great  com- 
mercial banks  outside  the  Bank  of  France.  They  cover 
the  country  with  their  branches.  The  thousands  of  local 
banks  which  formerly  existed  have  largely  passed  away. 
The  same  process  is  going  on  in  England.  With  two  or 
three  exceptions  London  is  to-day  the  home  of  the  large 
joint-stock  banks  of  that  country.  They  are  rapidly  ab- 

120 


MOVEMENT    OF    FUNDS 

sorbing  the  independent  banks  throughout  England  and 
establishing  their  branches  in  their  place.  *  The  branch 
system  will  drive  out  every  other  system  because  it  can  be 
operated  more  economically.  This  is  a  consideration  from 
the  banking  point  of  view,  but  in  my  judgment  it  would 
not  compensate  the  people  of  the  United  States  for  the 
loss  of  the  thousands  of  independent  banks  whose  stock 
is  owned  in  the  community,  whose  deposits  are  drawn 
from  the  community,  and  whose  interest  is  to  assist  and 
develop  in  every  way  the  business  of  the  community." 

THE  PUBLIC   BENEFITS   FROM  AN  ECONOMICAL  SYSTEM 

Here  is  the  reason  why  branch  banks  are  to  be  ex- 
pected in  the  United  States — because  they  are  more 
economical.  Mr.  Vreeland  says  this  is  a  consideration 
from  the  banking  standpoint,  but  that  it  should  not 
appeal  to  the  general  public.  But  surely  it  is  the  public 
that  will  reap  much  of  the  benefit  if  the  business  of  bank- 
ing is  carried  on  more  economically,  more  efficiently  and 
intelligently,  and  in  a  manner  to  gain  for  the  banks  a 
far  larger  share  of  the  confidence  of  the  people  at  home 
and  of  foreign  nations.  He  mentions  the  fact  that  France 
has  but  three  great  commercial  banks  outside  the  Bank 
of  France,  and  that  the  banking  control  in  England  is 
rapidly  passing  into  the  hands  of  a  few  great  London 
banks.  Yet  one  of  the  things  that  has  contributed  po 
erfully  to  lessen  the  number  of  banks  in  France  and  Eng- 
land is  the  existence  of  a  monopoly  of  note-issuing.  In 
France  the  Bank  of  France  has  the  sole  right  to  issue 
bank  notes;  in  England  the  Bank  of  England  has  prac- 
tically a  monopoly.  It  should  be  observed,  in  reference 
to  the  centralization  of  power  in  London,  that  the  small 
area  of  Great  Britain  makes  it  undesirable  that  more 
than  one  centre  should  exist.  For  example,  if  Wales 

*  The  italics  are  the  author's. 

121 


A    RATIONAL    BANKING    SYSTEM 

should  set  up  its  financial  centre,  and  the  northern 
counties  should  set  up  theirs,  it  would  be  much  the 
same  as  if  each  one  of  half  a  dozen  sections  of  Massa- 
chusetts or  Pennsylvania  were  to  set  up  its  financial 
centre  in  opposition  to  Boston  or  Philadelphia. 

A  CENTRAL  BANK  AND  MONOPOLY  OF  NOTE  ISSUE 

Judging  from  recent  utterances  of  its  prominent  mem- 
bers, the  National  Monetary  Commission  is  not  un- 
willing to  set  up  in  the  United  States  that  same  ob- 
noxious feature  or  monopoly  of  note  issue  which  has  been 
so  potent  in  restricting  banking  competition  in  Europe. 
Suppose  it  comes  about,  in  the  course  of  another  twenty- 
five  years,  that  in  the  matter  of  disgraceful  failures,  and 
in  that  of  humiliating  behavior  during  panics,  the  in- 
dependent banks  of  the  United  States  make  such  a  bad 
showing  that  the  people  turn  generally  to  branch  banking 
as  a  relief.  If  there  is  then  in  existence  a  great  central 
bank  with  a  monopoly  of  note  issue  the  fact  is  bound 
to  operate  most  importantly  to  reduce  the  usefulness  of 
the  ordinary  banks,  to  restrict  banking  competition, 
and  to  prevent  the  supplying  of  good  banking  facilities 
to  thousands  of  small  places.  When  the  branch  banks 
begin  to  replace  the  independent  banks  it  will  be  a  matter 
of  great  consequence  to  the  borrowing  classes  and  to  the 
people  of  the  country  districts  that  the  branch  institu- 
tions possess  note-issuing  rights.  If  the  banks  of  any 
country  are  strong,  and  in  every  way  worthy  of  con- 
fidence, they  will  be  most  useful  to  the  people  when  they 
are  permitted  to  exercise  their  functions  freely.  If  a 
wide  liberty  is  given  to  worthy  institutions  it  is  the  pub- 
lic that  will  derive  the  greatest  benefit.  Because  of  the 
smallness  and  weakness  of  the  independent  banks,  it  has 
been  necessary,  in  the  public  interest,  to  prevent  their 
exercising  certain  functions  which,  properly  performed, 
would  be  of  service  to  an  important  part  of  the  com- 

122 


MOVEMENT    OF    FUNDS 

munity.  Take  the  business  of  note  issue  for  example. 
I  am  not  competent  to  say  whether  the  power  to  issue 
notes  to  serve  as  currency  belongs  by  Divine  right  to 
the  Government  or  to  the  banks,  but  I  do  know  that 
when  generous  rights  of  issue  are  conferred  upon  banks 
that  are  worthy  of  them,  the  public,  especially  the  bor- 
ro-.ving  public,  benefits  directly  to  an  enormously  greater 
extent  than  it  would  from  a  jealous  retention  by  Govern- 
ment of  all  note-issuing  rights.  This  will  be  explained 
in  detail  in  another  place.  In  the  mean  time  I  shall  pro- 
ceed to  give  my  views  as  to  how  branch  banks  may  be 
expected  to  spread  and  develop  in  the  United  States 
when  the  time  comes  in  which  they  make  their  appear- 
ance in  force. 

EACH  SECTION  WILL  HAVE  ITS  OWN  BANKING  POWER 

There  is  every  probability  that  the  development  will 
take  place  along  sectional  lines  —  that  is  to  say,  the 
people  of  each  of  the  different  sections  of  the  country 
will  take  steps  to  ensure  that  they  will  be  served  by  banks 
identified  with  their  own  particular  interests.  Thus  the 
Northwestern  states  will  see  to  it  that  they  possess  banks 
devoting  themselves  mainly  to  financing  and  encouraging 
wheat  -  growing,  flour  -  milling,  lumbering,  wholesale  dis- 
tributing, as  well  as  the  retail  business  and  the  various 
forms  of  activity  in  evidence  in  the  country  towns.  The 
people  of  the  other  sections — the  Pacific,  the  Southwest, 
the  South,  the  East,  and  the  Middle  West— will  also  wish 
to  have  their  own  banks.  Quite  possibly  there  would  be 
at  first  a  strong  tendency  toward  the  creation  of  banks 
operating  exclusively  in,  and  belonging  altogether  to,  the  / 
individual  states.  For  example,  a  number  of  large  banksv' 
might  develop  in  California  with  head  offices  in  San 
Francisco  and  branches  throughout  the  state.  In  Minne- 
sota and  the  Dakotas  others  might  appear  with  head 
offices  in  St.  Paul  or  Minneapolis  and  branches  everywhere 

9  123 


A    RATIONAL    BANKING    SYSTEM 

through  the  wheat  fields.  Should  the  movement  get 
that  far -it  will  be  but  a  short  step  to  branch  banks  operat- 
ing in  a  whole  section.  From  these  again  the  transition 
will  be  easy  to  banks  of  a  national  character  covering  the 
whole  country. 

It  will  be  objected  that  even  if  the  Federal  legislators 
were  brought  to  permit  branch  banking,  the  state  legi Ma- 
tures could,  by  means  of  hostile  acts,  prevent  its  spread- 
ing. The  answer  is  that  branch  banks  are  now  regarded 
with  hostility  because  the  people  have  wrong  ideas  as  to 
the  effects  they  would  produce  If  these  errors  were  dis- 
pelled and  the  sentiment  became  more  friendly  the  same 
influence  that  induced  Congress  to  look  more  kindly  upon 
them  would  have  its  effect  upon  the  attitude  of  many  of 
the  states. 

EASTERN  BRANCHES  AND  WESTERN  BRANCHES 

In  reference  to  banks  serving  a  single  small  state, 
Canada's  experience  indicates  that  while  they  are  in- 
variably popular  they  may  not  prove  so  successful  or  so 
useful  as  others  the  operations  of  which  are  based  on 
wider  territory. 

It  has  been  mentioned  already  that  in  the  purely  agri- 
cultural districts  of  eastern  Canada  deposits  have  a 
general  tendency  to  exceed  loans.  The  only  places  in 
the  East  where  loans  habitually  or  generally  exceed  de- 
posits are  the  large  cities  and  such  of  the  towns  as  have 
important  manufacturing  industries,  or  other  special 
forms  of  activity.  But  in  western  Canada  conditions 
are  exactly  opposite.  There  it  is  a  regular  thing  with 
all  banks  doing  a  large  business  for  loans  to  exceed  de- 
posits, at  rural  branches  as  well  as  in  the  cities.  One 
reason  it  is  so  is  that  the  farmers  are  extensive  borrowers. 
From  1898  to  1900  I  had  charge  of  a  rural  branch  in  the 
Province  of  Manitoba  operated  by  one  of  the  important 
Eastern  banks.  Among  the  branch's  customers  were 

124 


MOVEMENT    OF    FUNDS 

many  well-to-do  farmers.  Almost  invariably  these  men 
were  borrowers,  not  depositors.  They  saw  so  clearly  the 
profit  in  wheat  growing,  and  were  so  rapidly  accumulating 
capital,  that  they  re-embarked  their  profits  at  once  in 
fresh  purchases  of  land,  equipment,  buildings,  etc.  The 
3  per  cent,  they  could  get  on  deposits  appeared  despicably 
small  to  them  when  considered  against  the  profit  to  be 
made  from  buying,  breaking,  and  developing  fresh  land. 
As  for  the  business  men  of  the  town,  practically  all  of 
them,  from  the  leading  merchant  down  to  the  blacksmith, 
were  borrowers  at  one  or  other  of  the  banks.  If  that 
banking  office  had  been  an  independent  entity  of  the 
United  States  type  its  ability  to  advance  funds  to  the 
farmers  and  townspeople  would  have  been  cut  down  by 
at  least  $200,000;  in  other  words,  it  could  only  have  ex- 
tended one-fifth  of  the  accommodation  which  it  actually 
provided  as  a  branch  bank. 

Thus  the  branch  banking  system  has  been  of  the  utmost 
value  to  western  Canadian  development.  Because  of  its 
existence  the  enterprising  people  of  that  section  have  had 
access  to  a  far  larger  fund  of  borrowable  capital  than  they 
would  have  had  under  a  system  of  local  banks.  Small 
local  banks  established  there  would  never  have  had  the 
credit  or  standing  necessary  to  draw  into  their  service  the 
millions  of  stagnant  wealth  from  the  slow  Eastern  districts. 

ADVANTAGE  OF  SERVING  A  WIDE  TERRITORY 

It  is  to  be  borne  in  mind  that  the  business  of  a  bank 
is  less  liable  to  severe  depression  or  disturbance  if  it 
serves  a  variety  of  industries  and  operates  in  a  wide  ter- 
ritory. If  for  example  a  bank  was  formed  and  operated 
exclusively  as  a  lumbermen's  bank,  its  fortunes  would  rise 
and  fall  with  the  fortunes  of  the  lumber  industry.  The 
same  would  apply  to  a  bank  involved  altogether  with  the 
boot  and  shoe  trade,  or  with  the  dry  goods  trade,  or  any 
other  of  the  great  trades  and  industries.  In  any  of  those 


A    RATIONAL    BANKING    SYSTEM 

cases  the  eggs  would  all  be  in  one  basket.  So  with  a 
bank  restricting  its  operations  to  a  particular  district. 
Everybody  knows  that  when  depression  comes  it  settles 
on  some  districts  or  localities  with  especial  severity. 
Within  certain  boundaries,  owing  to  the  failure  of  a  crop 
or  to  some  other  unfortunate  circumstance,  all  is  black 
and  gloomy;  outside,  conditions  are  not  so  bad,  and  per- 
haps a  short  distance  away  everything  is  progressing 
satisfactorily.  A  branch  bank,  scientifically  constituted, 
will  aim  to  have  its  operations  cover  a  wide  variety  of 
territory  and  a  wide  variety  of  interests  and  activities. 
Most  of  the  large  Canadian  banks  cover  the  Dominion 
very  completely,  and  a  depression  must  be  general  in 
character  to  affect  their  fortunes  appreciably. 

BRANCH  BANKS  AND  THE  WHEAT  CROP 

We  may  now  consider  the  practical  working  of  a  system 
of  branch  banks  in  financing  the  crops.  This  is  one  of 
the  tasks  in  the  handling  of  which  the  isolated  local  banks 
are  notoriously  deficient.  To  make  the  comparison  more 
effective  two  descriptions  will  be  given — the  first  out- 
lining the  financing  of  the  crops  under  the  present  system ; 
the  second  outlining  the  financing  as  it  would  be  done 
under  a  branch  system  similar  to  the  Canadian.  It  will 
be  most  convenient  to  take  the  spring  wheat  crop  of  the 
Northwest  as  the  example,  and  the  operation  of  handling 
it  will  be  taken  from  the  beginning  of  the  harvest  to  the 
close  of  the  season  in  the  following  spring. 

Under  the  present  system  all  banks  operating  in  the 
wheat  fields  must  prepare  during  the  summer  for  crop 
moving.  The  officers  of  each  individual  institution  know 
that  with  the  coming  of  August  and  September  they  will 
be  subjected  to  heavy  extraordinary  demands  for  cur- 
rency. Buyers  of  wheat  must  have  cash  to  pay  the 
farmers  at  all  points  where  wheat  is  delivered.  This  cash 
they  look  to  the  local  banks  to  provide.  These  demands 

126 


MOVEMENT    OF    FUNDS 

must  be  met.  The  local  banks  in  Minnesota  and  Dakota 
recognize  that  as  soon  as  the  threshing  season  is  in- 
augurated they  must  be  ready  to  supply  the  demands 
of  their  customers  for  circulating  medium.  Part  of  this 
demand  conies  upon  them  in  the  form  of  a  withdrawal 
of  deposits,  part  in  the  form  of  a  demand  for  loans,  and 
part  in  the  form  of  a  demand  for  cash  in  return  for  New 
York  or  Chicago  exchange.  As  the  season  develops,  the 
proportion  represented  by  the  loans  tends  to  get  rela- 
tively larger.  Looking  at  the  matter  in  its  largest  sense, 
and  supposing  the  Northwest  required  $50,000,000  of 
extra  currency  during  the  fall  to  move  its  wheat  crop, 
the  banks  there  must  be  prepared  to  hand  out  that  much 
of  extra  money  during  those  three  or  four  months. 

EVILS  OF  A  RIGID  CURRENCY 

During  the  rest  of  the  year,  comprising  eight  or  nine 
months,  no  employment  for  the  funds  offers  itself  in  their 
own  district — that  is,  no  suitable  employment.  If  the 
Northwestern  banks,  in  January  and  thereafter,  when 
they  have  finished  the  earlier  stages  of  moving  the  crops, 
followed  the  course  of  trying  to  use  in  their  ordinary 
loans  and  discounts  that  part  of  the  $50,000,000  of  extra 
currency  which  had  done  its  work  and  was  back  again 
on  their  hands,  their  action  would  produce  some  serious 
evils.  They  might  not  be  able  to  find  proper  invest- 
ment for  it,  but  assuming  that  they  were  successful  in 
placing  it  among  their  local  borrowers,  there  would  re- 
main the  necessity  of  recalling  it  from  the  parties  who 
had  it  as  soon  as  the  next  crop  was  ready  for  harvesting. 
Persons  familiar  with  the  banking  business  will  under- 
stand that  this  could  not  be  done;  for  the  parties  en- 
joying the  benefit  of  the  loans  would  not  willingly  re- 
linquish them.  To  force  them  to  do  so  would  cause  great 
hardship  and  dislocation  of  trade.  Therefore  that  policy 
is  not  followed  except  perhaps  by  inexperienced  bankers. 

127 


A    RATIONAL    BANKING    SYSTEM 

During  the  off  season  the  fund  must  be  in  reserve.  There 
probably  will  be  opportunity  to  put  out  a  certain  amount 
during  the  spring  and  summer  in  loans  required  to  finance 
operations  to  be  completed  before  the  harvest  begins; 
the  borrowers  in  this  case  would  make  repayment  of  their 
own  accord  not  later  than  July  or  August.  But  only  a 
small  part  of  the  whole  fund  could  be  used  in  that  man- 
ner. The  bulk  of  it  must  either  be  carried  as  cash  in 
vault  and  lie  idle  for  the  greater  part  of  the  year,  or  else 
sent  away  to  a  market  or  a  centre  which  will  pay  some- 
thing for  the  use  of  it,  and  be  ready  and  able  to  relinquish 
it  on  demand  or  on  a  date  fixed  to  fall  before  the  harvest 
begins.  Such  a  market  exists  in  New  York  City.  Some 
of  the  other  cities  have  risen  rapidly  in  financial  impor- 
tance, but  none  of  them  can  offer  the  advantages  which 
New  York  offers.  This  statement  holds  good  so  long  as 
New  York  is  the  financial  heart  of  the  country.  It  may 
be  supposed  by  some  bankers  anxious  to  build  up  Chicago, 
St.  Louis,  Kansas  City,  etc.,  that  their  reserve  money  is 
just  as  good  in  those  centres  as  in  New  York.  It  would 
be  just  as  good  if  the  reserve  agents  selected  held  the 
whole  of  it  as  cash  in  vault  against  the  day  of  withdrawal, 
but  that  they  do  not  do  They  could  not  afford  to  pay 
interest  on  it  if  they  did.  To  put  their  funds  in  use,  and 
at  the  same  time  have  them  so  that  they  can  surely  be 
recalled  at  will,  is  what  the  bankers  require.  There  is  no 
place  in  America  as  suitable  as  New  York  for  this  pur- 
pose. Banks  in  other  cities  may  be  as  strong  and  as 
solid  as  the  New  York  institutions,  but  there  is  no  place 
in  America  where,  speaking  generally,  call  loans  on  stocks 
and  bonds  are  equal  to  the  New  York  call  loans  in  point 
of  immediate  availability. 

RIVAL  FINANCIAL  CENTRES 

I  have  seen  it  argued  from  time  to  time  that  if  other 
centres,  such  as  Chicago  and  St.  Louis,  kept  their  reserve 

128 


MOVEMENT    OF    FUNDS 

money  at  home,  and  if  the  citizens  of  those  places  would 
do  their  speculating  at  home  instead  of  buying  and  sell- 
ing in  New  York,  their  home  stock-markets  would  be 
broader  and  better,  and  New  York  would  not  over- 
shadow them  to  such  an  extent  as  is  now  the  case.  But 
the  fact  is  that  no  matter  where  a  man  lives,  if  he  has 
any  intelligence  at  all,  when  he  undertakes  a  speculation 
or  deal  in  stocks  he  will  always  see  to  it  that  the  cir- 
cumstances connected  with  his  deal  are  as  favorable  to 
himself  as  he  can,  in  honor,  make  them.  One  thing  every 
sensible  man  will  try  to  do.  He  will  try  to  buy  or  sell  in 
the  best  market.  That  is  why  he  goes  to  New  York  to 
deal  in  stocks.  Dealing  in  Wall  Street,  if  he  wishes  to  ^ 
buy,  he  knows  he  will  find  sellers  from  his  own  city  like 
himself  dealing  in  the  best  market,  sellers  from  New  York 
City,  sellers  from  London,  Paris,  Berlin,  and  from  Europe 
in  general,  sellers  from  the  other  parts  of  the  United 
States,  from  Canada,  Mexico,  and  South  America.  And 
if  he  wishes  to  sell  there  will  be  buyers  from  the  rest  of  / 
the  world  to  bargain  with.  This  advantage — of  operat-  J 
ing  in  the  best  market — he  will  not  forego  for  all  his  local 
feeling.  Patriotism  even  does  not  induce  him  to  re- 
linquish it.  For  if  there  is  a  certain  stock  which  may  be 
bought  better  in  London  than  in  New  York,  the  New 
Yorker  will  cable  his  order  to  the  other  side  of  the  Atlantic. 
That  is  one  reason  why  New  York  is  the  best  centre  for 
reserve  money.  Another  is  that  call  loans  there  may  be 
called  when  funds  are  wanted.  One  of  the  most  prom- 
inent Chicago  bankers  recently  said,  in  reference  to  the 
matter  of  call  loans,  "We  have  call  loans  in  Chicago,  but 
if  we  were  to  call  them  it  would  make  us  very  unpopular." 

NEW  YORK  THE  BEST  CENTRE 

So  a  large  part  of  the  $50,000,000  released  from  service 
in  the  Northwest  goes  to  New  York  during  the  spring  and 
summer.  It  will  probably  happen  that  many  banks  in 

129 


A    RATIONAL    BANKING    SYSTEM 

the  Northwest  send  their  shipments  of  currency  to,  and 
carry  their  balances  in,  banks  in  Minneapolis,  St.  Paul, 
Chicago,  and  St.  Louis;  but  it  is  certain  that  these  banks 
in  turn  will  send  a  part  of  the  money  on  to  New  York 
either  as  balances  in  reserve  banks  there  or  as  call  loans 
to  New  York  stock-brokers. 

There  may  not  be  any  work  awaiting  this  currency  on 
its  arrival  at  the  metropolis.  It  swells  the  bank  sur- 
pluses, and  its  presence  is  quickly  noted  by  the  speculating 
cliques.  Quite  frequently  its  coming  is  marked  by  a 
lowering  or  reduction  of  interest  rates.  When  this  hap- 
\  pens  the  combination  of  the  two  circumstances  —  abun- 
J dance  of  available  credits  and  cheap  rates  of  interest — 
may  prove  too  great  a  temptation  for  the  cliques  to  resist. 
They  are  induced  to  inaugurate  bull  movements  with  the 
idea  of  unloading  on  the  unwary  at  top  prices,  sometimes 
when  conditions  do  not  warrant  any  advancement  of  the 
price  level. 

At  any  rate,  the  fund  goes  largely  into  call  loans  to 
New  York  Stock  Exchange  houses.  About  August  the 
Northwestern  banks  begin  to  prepare  for  the  autumn 
demands.  They  start  withdrawing  their  balances  from 
New  York,  and  calling  in  their  loans  there,  asking  that 
the  proceeds  be  shipped  in  the  form  of  currency,  so  much 
per  day  or  so  much  per  week,  so  as  to  make  the  movement 
conform  approximately  to  their  requirements. 

I  am  aware  that  large  banks  in  Chicago  finance  some  of 
the  more  important  grain-buying  and  flour-milling  con- 
cerns in  the  Northwest  in  the  same  way  as  the  large 
Boston  banks  finance  important  cotton  mills  in  the 
Southern  states.  The  fact  does  not  materially  affect  the 
argument  I  am  now  presenting;  and,  as  remarked  before, 
the  practice  is  an  argument  for  branch  banking,  inas- 
much as  if  these  Southern  cotton  mills  and  the  North- 
western grain  and  milling  concerns  must  depend  on  loans 
from  Boston  and  Chicago  banks  it  would  be  better  for 
both  borrowers  and  lenders  if  the  banks  could  establish 


MOVEMENT    OF    FUNDS 

branches  at  the  points  where  their  important  borrowers 
operated. 

RECALLING  THE  NEW  YORK  BALANCES 

To  resume  the  narrative — in  Minnesota  and  the  Dakotas 
the  country  banks  are  being  asked  to  relinquish  deposits 
and  to  make  loans  to  parties  connected  directly  or  in- 
directly with  the  grain  trade,  or  whose  business  opera- 
tions are  affected  by  the  movement  of  wheat  to  market. 
In  the  wheat  districts,  as  the  currency  goes  into  employ- 
ment, the  amount  in  the  hands  of  farmers,  grain  dealers, 
storekeepers,  gets  larger  and  larger,  while  the  wheat  streams 
into  the  country  elevators  on  its  way  to  the  terminals 
and  ports.  By-and-by  the  interior  banks  have  all  their 
resources  in  play,  and  some  of  them  borrow  from  the  city 
banks  so  as  to  be  able  to  support  their  customers.  Each 
bank's  ability  to  lend  to  the  people  in  its  constituency 
depends  upon  the  condition  of  its  resources.  If  the  local 
bank  has  a  large  proportion  of  liquid  resources — cash, 
and  call  loans  and  balances  in  New  York — it  can  lend 
extensively  at  harvest  time.  But  if  its  resources  are 
already  fully  employed  when  the  harvest  commences,  it 
cannot  lend  further  assistance  except  through  borrowing 
or  rediscounting. 

In  New  York  the  banks  may,  at  first,  respond  to  the 
calls  from  the  interior  without  disturbing  their  loans  on 
stock  market  collateral;  but,  as  their  reserves  fall  nearer 
to  the  legal  minimum,  they  usually  are  obliged  to  call  in 
their  loans,  and,  likely  as  not,  stringency  will  develop. 

SUPPLY  OP  CURRENCY  NOT  REGULATED  BY  DEMAND 

Taking  the  whole  business  broadly,  it  is  to  be  seen  that 
this  special  commercial  use  for  the  $50,000,000  currency 
exists  only  about  three  and  a  half  months  in  each  year. 
So  that  if  the  supply  of  currency  in  the  United  States  at 


A    RATIONAL    BANKING    SYSTEM 

harvest  time  is  exactly  equal  to  the  requirements,  then, 
after  the  work  is  done,  there  is  a  surplus  of  $50,000,000 
for  which  no  legitimate  work  offers.  And  if  it  be  assumed 
that  there  is  in  the  country  an  amount  of  currency  exactly 
sufficient  for  the  requirements  during  the  rest  of  the 
year,  then  it  follows  that  the  extra  need  of  the  harvest 
time  will  create  stringency  because  the  supply  is  deficient. 
Let  us  next  picture  the  financing  of  the  Northwestern 
wheat  crops  under  a  system  of  branch  banks.  Suppose 
that  we  are  watching  the  operations  of  a  great  bank — 
which  we  may  designate  the  Bank  of  Minnesota — with 
head  office  in  Minneapolis  and  branches  scattered  every- 
where in  the  wheat  fields,  as  well  as  in  New  York,  Chicago, 
and  in  smaller  places  in  the  East.  It  will  be  assumed 
also  that  this  hypothetical  Bank  of  Minnesota,  in  com- 
mon with  the  other  branch  banks  operating  throughout 
the  country,  has  note-issuing  privileges  similar  in  char- 
acter to  those  possessed  by  the  chartered  banks  of  Canada. 


VIII 
ANOTHER   HYPOTHETICAL   BRANCH   BANK 

THE  BANK  OF  MINNESOTA 

THOUGH  the  principal  aim  of  this  bank  is  to  finance 
Western  or  Northwestern  development,  it  has  found 
it  advisable  to  acquire  large  interests  in  other  parts  of 
the  country.  Thus  it  has  established  branches  in  some 
depositing  districts  of  the  East  with  the  object  of  getting 
money  for  Western  borrowers.  How  this  may  be  done 
without  injury  to  the  Eastern  localities  has  already  been 
explained.  Then  the  close  identification  of  Chicago  with 
the  wheat  business,  and  the  concentration  there  of  houses 
and  institutions  dealing  directly  with  the  Northwest, 
have  made  it  advisable  to  maintain  an  important  branch 
in  Chicago.  Also,  like  the  other  large  branch  banks,  re- 
gardless of  where  their  head  offices  are  located,  the  Bank 
of  Minnesota  maintains  a  branch  in  New  York  City. 
Because  of  the  nature  of  the  business  done  by  it,  and  be- 
cause of  the  magnitude  of  its  operations,  this  New  York 
City  branch  ranks  practically  equal  in  importance  with 
the  main  branch  in  Minneapolis,  which  is  directly  under 
the  supervision  of  the  head  office  executive. 

FUNCTIONS  OF  THE  NEW  YORK  CITY  BRANCH 

First,  the  New  York  City  branch  acts  as  New  York  cor- 
respondent for  all  the  branches  of  the  bank.  When  the 
branches  acquire  New  York  checks,  drafts,  or  exchange, 

133 


A    RATIONAL    BANKING    SYSTEM 

instead  of  sending  them  to  some  great  New  York  City 
bank  for  credit  of  account,  as  is  done  by  all  the  isolated 
country  banks  at  present,  they  send  them  to  their  own 
New  York  branch.  Also,  whenever  they  issue  drafts  on 
New  York,  they  draw  on  the  branch,  not  on  an  outside 
institution. 

Second,  the  New  York  branch  acts  as  custodian  of  a 
large  part  of  the  reserve  carried  in  actual  cash.  It  is  to 
be  remembered  that  there  are  several  other  Western  or 
Northwestern  banks  operating  in  the  wheat  fields;  also 
that  some  large  banks  with  head  offices  in  Eastern  cities 
have  branch  systems  in  that  section  of  the  country.  It 
will  happen  that  in  Minneapolis  and  St.  Paul  are  repre- 
sented, perhaps,  three  dozen  or  more  important  banks. 
Each  one  has  its  principal  branch  for  the  district  in  the 
heart  of  the  financial  part  of  one  or  other  of  the  two  cities. 
From  these  centres  scores  of  auxiliary  branches  radiate 
through  the  outlying  sections  of  the  cities  and  through 
the  whole  wheat  country.  Thus  it  would  happen  that 
in  an  interior  town  of  twenty-five  thousand  inhabitants, 
if  it  were  a  good  centre,  there  might  be  a  dozen  or  fifteen 
banks  represented — both  Eastern  and  Western  institu- 
tions— and  in  a  smaller  place  of  ten  thousand  population 
there  might  be  eight  or  ten.  In  each  of  the  little  villages 
of  three  hundred  or  four  hundred  people  there  would 
surely  be  one  bank,  and  if  there  existed  a  reasonable 
prospect  of  the  place  growing  satisfactorily  very  likely 
there  would  be  two.  The  villages  and  towns  with  popu- 
lations between  three  hundred  and  five  thousand  would 
have  from  two  banks  to  half  a  dozen,  according  to  the 
amount  of  business  they  supplied. 

EXCHANGES  AT  THE  LESSER  BRANCHES 

At  these  lesser  points,  under  the  branch  system  which 
is  being  pictured,  the  banks,  of  course,  would  have  a 
daily  exchange  of  checks  and  notes.  They  would  not, 

134 


ANOTHER  HYPOTHETICAL  BRANCH  BANK 

however,  settle  differences  in  cash.  Settlement  would  be 
by  draft  on  whatever  centre  the  respective  parties  agreed 
upon.  Thus,  probably,  it  would  be  agreed  in  many  in- 
stances to  settle  by  draft  on  Minneapolis  or  St.  Paul;  and 
in  others  by  draft  on  Chicago  or  New  York.  The  settling 
centres  would  be  exactly  as  the  various  reserve  centres 
are  now.  So  it  would  not  be  necessary  to  carry  large 
legals  for  clearing-house  or  settlement  purposes  at  any  of 
the  country  offices.  Each  branch  might  carry  a  few  large 
notes  for  meeting  the  demands  of  individual  customers, 
should  it  have  customers  in  the  habit  of  demanding  them. 
Apart  from  these,  practically  the  whole  stock  of  legals 
and  most  of  the  specie  would  be  concentrated  at  the 
central  branches.  Though  the  country  branches  through- 
out Minnesota  and  the  Dakotas  might  draw  on  Minne- 
apolis or  St.  Paul  when  settling  differences  with  other 
banks,  the  Minneapolis  and  St.  Paul  offices,  even  of  the 
purely  Western  banks,  would  find  in  actual  practice  that 
it  was  advantageous  for  them  to  carry  a  large  part  of 
their  specie  and  legals  in  New  York  City. 

THE  RESERVE  AGAINST  DEPOSITS 

The  Bank  of  Minnesota,  for  example,  would  find  that 
many  of  its  customers  on  getting  loans  from  it  would  re- 
quire to  have  the  proceeds  paid  to  parties  in  New  York. 
Also  that  the  depositors,  or  many  of  them,  in  making 
withdrawals  would  do  so  through  the  New  York  branch. 
And  all  the  time  there  would  be  trafficking  in  New  York 
exchange  by  the  banks  in  the  twin  cities.  For  buying 
and  selling  sterling  and  foreign  exchange  New  York 
would  be  largely  used.  Purchases  and  sales  of  securities, 
too,  would  take  place  there.  So  it  would  be  necessary 
to  carry  a  large  balance  of  specie  and  legals  in  the  me- 
tropolis. But  the  reserve  would  not,  by  any  means,  con- 
sist entirely  of  specie  and  legals.  Specie  and  legals  would 
constitute  the  first  line  of  defence.  Behind  them  would 


A    RATIONAL    BANKING    SYSTEM 

come  the  balances  in  great  international  banks  and  the 
call  loans  in  the  great  international  markets.  While  the 
Bank  of  Minnesota  need  not  necessarily  carry  a  large  ac- 
count or  balance  with  another  bank  in  New  York  City,  it 
certainly  would  carry  a  balance  in  London  and,  perhaps, 
also  in  Paris.  The  Bank  of  England  or  one  of  the  great 
British  joint-stock  banks  would  be  its  London  bankers. 
Perhaps  it  would,  like  the  Canadian  banks,  deposit  several 
million  dollars'  worth  of  bonds  having  an  international 
market  with  its  London  bankers  to  be  used  as  cover  for 
drawings. 

After  the  international  bank  balances  would  come  the 
call  loans.  These,  if  they  formed  an  integral  part  of  the 
reserve  against  deposits,  must  necessarily  be  at  New  York 
or  London  or  Paris.  Call  loans  on  stocks  and  bonds  at 
other  cities  in  the  United  States,  for  the  reason  explained 
in  the  previous  chapter,  though  they  may  be  safe  enough 
and  sure  enough  of  repayment,  cannot  equal  call  loans 
at  the  international  centres  in  the  quality  of  instantane- 
ously producing  specie  and  legals  on  demand. 

LESSENING  OP  NEW  YORK'S  CONTROL 

Let  us  here  take  note  of  one  significant  economic  change 
that  would  occur  as  a  result  of  a  change  in  the  character 
of  the  banks.  Suppose  the  Bank  of  Minnesota  has 
$12,000,000  at  call  in  Wall  Street  —  the  fund  forming 
part  of  its  reserve  against  deposits.  This  money  is  con- 
trolled from  Minneapolis  —  absolutely.  It  is  put  out 
solely  for  the  convenience  and  profit  of  the  Bank  of  Min- 
nesota. If  the  bank's  stock  of  specie  and  legals  accumu- 
lates through  the  increase  of  deposits  or  the  repayment 
of  loans  in  the  ordinary  course  of  its  business,  the  branch 
in  New  York  will  put  out  some  more  millions  at  call. 
If,  on  the  other  hand,  the  specie  and  legals  fall,  through 
the  withdrawal  of  deposits  or  the  making  of  loans,  some 
part  of  the  $12,000,000  is  called  in.  There  can  be  no 

136 


ANOTHER  HYPOTHETICAL  BRANCH  BANK 

suspicion,  in  this  case,  of  manipulation  of  the  money  or 
stock  markets  for  the  benefit  of  capitalists  or  financiers 
in  New  York. 

An  instructive  comparison  may  be  instituted  by  sup- 
posing that  the  Bank  of  Minnesota  has  one  hundred  and 
fifty  branches,  that  the  total  of  its  international  bank 
balances,  its  specie  and  legals,  and  its  call  loans  carried 
in  New  York  is  $30,000,000;  and  by  supposing  secondly 
that  at  present  one  hundred  and  fifty  isolated  banks  in 
the  Northwest  and  the  East,  the  operations  of  which 
would  correspond  to  those  of  the  hypothetical  Bank  of 
Minnesota  and  its  branches,  carry  the  same  amount  of 
$30,000,000  in  the  form  of  call  loans  and  balances  in 
New  York.  Under  the  present  system  the  fund  of 
$30,000,000  has  one  hundred  and  fifty  owners.  They 
send  the  cash  to  various  great  banks  in  New  York  City, 
which  take  it  on  deposit  and  use  it  as  their  own  money, 
or  lend  it  for  the  account  of  their  correspondents.  A 
number  of  the  most  important  New  York  depository 
banks  are  understood  to  be  hand  and  glove  with  those 
powerful  market  interests  of  which  the  rest  of  the  country 
professes  to  be  much  afraid.  These  interests  thus  have, 
at  present,  the  practical  control  of  perhaps  a  third,  per- 
haps a  half,  and  perhaps  two-thirds  of  the  whole  fund  of 
$30,000,000  here  referred  to;  while  under  the  brand} 
system,  if  those  one  hundred  and  fifty  banks  comprised 
the  Bank  of  Minnesota,  they  would  not  control  a  dollar 
of  the  money.  This  is  one  way  in  which  the  control  of 
those  metropolitan  financiers  over  the  cash  resources  ofj 
the  country  might  be  weakened  through  the  institution' 
of  branch  banks. 

THE  BANK  OP  MINNESOTA  IN  A  PANIC 

Take  the  change  in  another  way:  Suppose  a  panic  is 
in  progress.  Quite  probably  one  hundred  out  of  the  one 
hundred  and  fifty  isolated  banks  controlling  the  $30,- 

137 


A    RATIONAL    BANKING    SYSTEM 

000,000  of  funds  in  New  York  would  demand  the  im- 
mediate return  of  perhaps  one-half  of  their  balances  and 
loans,  merely  as  a  precaution,  when  they  were  not  in 
any  danger  at  all.  New  York  is  thus  legally  under  the 
necessity  of  surrendering  these  millions  at  a  time  in 
which  it  sorely  needs  every  dollar.  If  the  same  funds 
were  controlled  by  the  Bank  of  Minnesota,  how  differently 
they  would  be  handled.  The  panic  breaks  in  New  York 
— probably  an  important  bank  suspends  and  stocks  crash 
downward.  The  manager  of  the  New  York  branch,  who 
is  a  thoroughly  competent  and  trustworthy  official,  keeps 
the  head  office  informed  hourly  as  to  the  situation.  He 
does  not  need  to  explain  at  the  outset  that  the  bank  is 
not  involved  in  the  failure  through  lock-up  of  its  balance, 
for  it  keeps  no  balance  in  New  York  banks.  It  may,  per- 
haps, have  $300,000  or  $400,000  or  more  in  checks  and 
exchanges  for  the  failed  bank,  but  the  greater  part  of 
this  sum  can  be  at  once  recovered  through  charging  back 
the  items  to  the  customers  from  whom  they  were  re- 
ceived. So  there  is  no  danger  of  balances  being  locked 
up.  The  New  York  specie  and  legals  are  safe,  because 
they  lie  securely  in  the  Bank  of  Minnesota's  own  vaults. 
There  only  remain  the  call  loans.  These  have  been  made 
to  Stock  Exchange  borrowers  of  the  highest  standing 
strictly  on  securities  possessing  a  good  market.  That  is 
the  kind  of  loans  that  are  made  by  the  Canadian  banks 
in  New  York,  and  it  would  be  the  same  with  good  Ameri- 
can branch  banks  like  the  Bank  of  Minnesota.  In  mak- 
ing them  the  New  York  manager  kept  in  view  the  fact 
that  they  must  be  surely  available  on  demand.  He  was 
not  concerned  in  making  a  market  for  any  particular  stock 
or  stocks,  or  in  market  movements  of  any  kind.  Con- 
sequently, when  the  panic  developed  he  could  assure  his 
head  office  that  the  call  loans  were  all  right,  and  that 
there  need  be  no  uneasiness  in  regard  to  them.  He 
would  be  exceedingly  careful  to  see  that  every  borrower 
kept  up  his  margin,  and  the  standing  of  the  borrowers 

138 


ANOTHER  HYPOTHETICAL  BRANCH  BANK 

being  of  the  best,  they  would  certainly  respond  at  once 
to  demands  for  margin.  So  he  could  assure  the  head- 
office  people  that  so  far  as  New  York  was  concerned  they 
might  proceed  with  their  business  as  usual. 

A  FACTOR  IN  PRESERVING  STABILITY 

Probably  it  would  happen  that  the  committee  or  asso- 
ciation of  bankers  and  financiers  in  New  York  that  was 
engaged  most  actively  in  fighting  the  panic  would  find  it 
necessary  at  an  early  stage  of  the  crisis  to  support  one  or 
more  important  banking  institutions  or  business  houses 
that  were  threatened  with  insolvency.  Should  that  be 
the  case  the  Bank  of  Minnesota — of  course  under  authority 
from  Minneapolis — would  take  its  part  with  other  banks 
in  preserving  stability.  It  could,  without  undue  danger 
to  itself,  advance  its  quota  of  several  millions  to  the  gen- 
eral fund  for  this  purpose.  The  public  announcement  of 
its  name  as  one  of  the  banks  lending  assistance  would 
strengthen  its  own  credit  and  reassure  its  own  depositors. 

Out  in  the  Northwest  the  people  would  hardly  be  aware 
that  there  was  a  panic.  The  various  branches  of  the 
bank  would  have  little  concern  in  the  matter.  So  they 
proceed  with  their  regular  operations  very  much  as 
usual.  They  draw  on  Minneapolis,  St.  Paul,  Chicago, 
New  York,  in  the  accustomed  manner.  Their  drafts  are 
honored,  as  before,  in  specie  and  legals.  Great  banks  like 
these,  intently  concerned  in  building  up  a  spotless  repu- 
tation for  themselves,  will  not  consent  to  anything  so 
dishonorable  as  a  suspension  of  payments  except  in  the 
gravest  emergency.  That  emergency  is  not  so  likely  to 
occur  if  the  country  banks  refrain  from  withdrawing  cash 
from  the  centres  and  hoarding  it. 

THE  COUNTRY  BRANCHES  CONTINUE  DISCOUNTING 

The  country  offices  of  the  Bank  of  Minnesota  continue  to 
give  the  customary  support  to  their  regular  borrowers.     In 
10  139 


A    RATIONAL    BANKING    SYSTEM 

deference  to  the  panic  and  to  the  stringency  in  money 
the  executive  will  have  sent  round  instructions  to  the 
branches  requiring  the  managers  to  abstain  from  com- 
mitting the  bank  to  advances  for  new  enterprises  or  new 
connections,  also  to  hold  their  borrowers  in  check,  re- 
straining them  from  going  into  extensions  and  from  taking 
up  new  ventures.  In  all  probability  this  policy  would  be 
instituted  before  the  panic  developed.  With  these  limita- 
tions business  goes  on  as  usual.  Storekeepers  and  factory 
owners,  farmers,  dealers,  and  others,  who  have  been  wise 
enough  to  keep  their  indebtedness  well  in  hand,  lodge 
their  bills  and  notes  with  the  bank  as  usual;  the  bank 
discounts  them,  proceeds  are  put  to  credit  of  the  bor- 
rowers' accounts,  checks  are  drawn  against  balances  and 
are  paid  in  cash  without  demur. 

If  a  different  course  were  followed,  and  the  bank,  falling 
into  a  panic  itself,  began  savagely  to  call  its  loans  in  New 
York,  and  to  collect  all  the  specie  and  legals  it  could  lay 
hands  upon,  and  if  the  executives  sent  orders  to  the 
branches  to  stop  discounting  even  for  regular  customers 
and  to  exact  payment  of  all  notes  and  bills  as  they  came 
due,  what  a  different  state  of  affairs  would  exist.  Such 
a  policy  generally  followed  would  precipitate  Stock  Ex- 
change and  other  failures  and  the  bad  effects  of  the  panic 
would  be  intensified. 

SECURITY  OF  THE  NOTE  ISSUES 

The  reader  will  have  derived  from  the  foregoing  ex- 
planation a  partial  knowledge  of  the  business  carried  on 
by  the  Bank  of  Minnesota.  Before  describing  its  method 
of  financing  the  spring  wheat  crop  of  the  Northwest  it 
will  be  well  to  describe  the  note-issuing  powers  with 
which  it  should  be  endowed.  It  may  be  said  that  the 
note  issues  of  the  Canadian  chartered  banks  are  believed 
by  the  experts  to  be  absolutely  secure.  Besides  the 
priority  of  claim  upon  the  assets  and  the  practical  guar- 

140 


ANOTHER  HYPOTHETICAL  BRANCH  BANK 

anty  of  the  associated  banks,  the  bank  notes  are  protected 
by  the  Bank  Circulation  Redemption  Fund  held  by  the 
Minister  of  Finance  and  Receiver  General  of  Canada. 
This  fund  is  the  property  of  the  banks  contributing  it, 
but  liable  to  be  used  for  paying  the  notes  of  a  failed  bank, 
providing  the  liquidator  does  not  do  so  within  sixty  days 
from  the  date  of  suspension.  Each  bank  must  keep  in 
the  fund  a  balance  equal  to  5  per  cent,  of  its  note  circu- 
tion  as  that  averages  through  the  year  up  to  the  preced- 
ing 3oth  June.  The  total  of  the  fund,  therefore,  amounts 
roughly  to  5  per  cent,  of  the  whole  average  circulation. 
Essentially  the  security  behind  the  notes  is  not  the  fund 
but  the  first  lien  on  the  assets  and  the  guaranty  of  the 
associated  banks.  If  the  fund  is  depleted  the  banks  may 
be  called  upon  to  restore  the  balance — up  to  the  5  per  cent, 
required — but  not  at  a  greater  rate  than  i  per  cent,  of 
their  average  circulation  per  year.  The  first  lien  provision 
and  the  necessity  to  provide  5  per  cent,  for  the  redemption 
fund  apply  to  the  extraordinary  issues  as  well  as  to  the 
ordinary. 

ECONOMY  OP  CASH  CAPITAL 

We  may  suppose  that  the  Bank  of  Minnesota  has  a 
paid-up  capital  of  $12,000,000,  and  that  it  has  the  right 
to  issue  its  own  notes,  uncovered  by  specific  security  and 
free  from  tax,  up  to  that  amount.  We  may  suppose 
further  that  its  circulation  runs,  during  the  summer 
months  preceding  the  harvest  season,  at  $6,000,000.  At 
the  commencement  of  the  grain  deliveries  it  would,  there- 
fore, be  in  position  to  supply  roughly  $6,000,000  in  cur- 
rency for  crop  moving  purposes.  But  this  bank  is  only 
one  of  a  considerable  number  actively  operating  in  the 
Northwest.  Taken  altogether  these  banks  could  prob- 
ably supply  $125,000,000  or  $150,000,000  in  new  currency 
if  it  were  required.  However,  as  the  Bank  of  Minnesota 
is  one  of  the  local  Northwestern  banks,  with  directors, 
stockholders,  and  friends  closely  identified  with  the  grain 

141 


A    RATIONAL    BANKING    SYSTEM 

trade,  it  is  able  to  find  a  use  for  the  whole  of  its  $6,000,000 
margin.     Let  us  now  follow  its  operations. 

To  maintain  its  circulation  of  $6,000,000  in  quiet  times, 
and  of  $11,000,000  or  so  in  harvest  time,  the  bank  must 
possess  probably  $5,000,000  or  $6,000,000  in  notes,  signed 
and  ready  for  issue,  over  and  above  the  amount  actually 
in  circulation.  This  is  necessary  because  all  the  branches 
must  have  a  sufficiency  of  till  money.  At  the  smaller 
country  branches  perhaps  an  average  of  $15,000  or 
$20,000  per  branch  would  be  required  all  the  time  re- 
gardless of  the  amount  outstanding.  And  the  depot 
branches,  or  centrally  situated  branches,  would  need  to 
carry  much  larger  sums.  Altogether,  probably  $40,000 
per  branch  would  not  be  too  high  an  estimate  of  the 
reserve  supply  of  notes  required  to  be  carried.  If  the 
branches  are  taken  to  number  one  hundred  and  fifty  this 
requirement  comes  out  at  $6,000,000. 

THE  COST  OF  PROVIDING  CURRENCY 

So,  during  the  summer,  the  head  office  would  arrange 
for  a  supply  of  notes  sufficient  to  replace  worn  notes  and 
to  make  the  balance  of  good  notes  on  hand  and  in  circu- 
lation up  to  about  $18,000,000.  If  the  amount  outstand- 
ing was  $6,000,000  there  would  be  $12,000,000  on  hand 
available  for  issue  and  for  till  money.  This  $12,000,000 
in  the  bank's  own  notes  might  consist  of  $4,000,000  in 
fives,  $5,000,000  in  tens,  and  $3,000,000  in  twenties, 
fifties,  and  hundreds.  In  other  words,  the  specification 
of  its  own  notes  held  by  the  bank  might  read  as  follows: 

800,000       x       $     5.       =          $4,000,000 
500,000        x  10.       =  5,000,000 

50,000  X  20.  =  1,000,000 

20,000        x  50.        =  1,000,000 

IO,OOO          X  IOO.          =  IjOOO.OOO 


1,380,000  $12,000,000 

142 


ANOTHER  HYPOTHETICAL  BRANCH  BANK 

Over  and  above  the  cost  of  the  plates,  if  the  cost  of 
each  note  be  set  at  2\  cents,  the  bank  would  need  to 
make  an  outlay  in  cash  of  only  $31,050  in  order  to  pro- 
vide itself  with  this  potential  currency  amounting  to 
$12,000,000,  of  which  $6,000,000  might  be  issued  and 
$6,000,000  held  as  till  money.  It  may  also  have  been 
obliged  to  deposit  $450,000  in  the  general  redemption 
fund.  Thus  at  the  outset  the  difference  in  methods  of 
preparing  for  the  crops  is  seen.  The  Bank  of  Minnesota 
has  ready  to  pay  out  $6,000,000  of  currency,  and  has  only 
parted  with  $481,050  of  its  cash  resources  to  get  it.  Under 
the  present  system  that  aggregation  of  one  hundred  and 
fifty  banking  offices  could  not  prepare  $6,000,000  in  cur- 
rency without  engaging  a  full  $6,000,000  of  their  re- 
sources. To  whatever  extent  they  augment  their  store 
of  circulating  medium  in  the  late  summer,  they  must 
draw  upon  resources  that  have  been  employed  in  some 
other  way. 

LENDING  TO  THE  GRAIN  TRADE 

In  the  summer,  some  little  while  before  the  first  de- 
livery of  grain  will  take  place,  the  various  grain-buying 
and  milling  firms,  and  companies  that  have  accounts  with 
the  bank  and  its  branches,  would  arrange  for  their  lines 
of  credit.  A  few  of  these  concerns  may  transact  so  large 
a  business  and  require  such  heavy  advances  that  two  or 
three  large  banks  may  unite  to  carry  each  account.  The 
several  banks  combining  to  carry  an  account  of  this  kind 
would  agree  among  themselves  as  to  the  proportion  to  be 
assumed  by  each.  Accounts  requiring  credits  not  greater 
than  $1,000,000,  or  $1,500,000,  or  perhaps  in  some  cases 
$2,000,000,  would  be  carried  by  one  bank.  It  has  already 
been  remarked  that  the  directors,  stockholders,  and  close 
connections  of  the  Bank  of  Minnesota  include  some  men 
influential  in  the  Northwestern  grain  trade.  Therefore, 
the  bank  is  certain  to  have  its  share  of  good  grain  and 


A    RATIONAL    BANKING    SYSTEM 

milling  accounts.  It  will  have  a  number  which  deal  ex- 
clusively with  it;  and  it  will  also  participate  in  carrying 
some  of  the  best  of  the  larger  divided  accounts.  Six 
weeks  or  a  month  before  the  crop  is  ready  for  marketing, 
the  general  manager  and  the  board  of  directors  will  have 
completed  their  work  of  considering  and  acting  upon  the 
credits  asked  for  by  all  these  customers.  At  the  prin- 
cipal branch  in  Minneapolis  (that  under  the  shadow  of, 
and  in  the  same  building  as,  the  executive  offices),  and 
at  all  the  branches  throughout  the  wheat  country,  the 
managers  and  officers  have  been  informed  of  the  amounts 
they  are  authorized  to  lend  to  each  important  customer, 
the  rate  of  interest  which  the  loan  shall  bear,  the  security 
on  which  it  is  to  be  based,  and  the  other  terms  and  con- 
ditions on  which  it  is  to  be  made.  Also,  as  we  have  seen, 
the  currency  is  ready  for  paying  out — not  a  dollar  having 
been  withdrawn  from  use  either  in  the  Northwest  or  any 
other  part  of  the  country. 

But  though  it  has  not  been  necessary  to  call  loans  in 
order  to  provide  a  sufficiency  of  the  bank  note  currency, 
the  bank  may  have  found  it  advisable  to  reduce  its  New 
York  call  loans  to  a  moderate  extent  in  view  of  the 
heavy  advances  it  has  agreed  to  make  to  Northwestern 
interests. 

WHEN  WHEAT  DELIVERIES  COMMENCE 

The  machinery  is  ready,  waiting  for  the  call  to  work. 
The  wheels  are  set  in  motion  by  the  appearance  of  new 
wheat  in  the  market  at  some  of  the  small  country  towns. 
Buyers  there  for  local  millers  or  dealers,  and  for  Minneap- 
olis concerns,  wire  to  their  principals  that  deliveries  will 
commence  next  day  and  ask  for  a  supply  of  cash.  Im- 
mediately the  bank  credits  are  used.  Local  dealers  at 
the  points  in  question  appear  at  the  local  branches  of  the 
bank,  put  in  their  credit  obligations,  and  borrow  under 
the  terms  of  their  arrangements.  It  may  be  that  some 
of  the  dealers  are  able  to  take  the  wheat  and  give  in 

144 


ANOTHER  HYPOTHETICAL  BRANCH  BANK 

exchange  orders  or  checks  on  the  local  branch,  thus  econo- 
mizing the  use  of  cash.  Whether  this  is  done,  or  whether 
the  buyers  draw  bank  notes  from  the  bank  and  pay  them 
out  for  the  grain  delivered,  the  effect  is  the  same — the 
bank's  note  circulation  is  moving  out,  and  at  the  same 
time  the  aggregate  of  its  grain  loans  is  rising.  Either 
through  paying  out  the  notes  themselves  to  the  grain 
firms,  or  through  paying  them  out  against  checks  given 
to  the  farmers  by  the  grain  buyers,  the  notes  go  out 
largely  as  the  proceeds  of  loans.  It  may  be  that  the 
bank  has  contracted  with  the  grain  trade  to  advance  in 
the  aggregate  $11,000,000  and  that  grain  loans  to  that 
amount  are  actually  current  at  the  time  the  note  circula- 
tion is  at  the  maximum.  If  it  were  possible  to  analyze 
these  loans,  and  to  discover  in  what  form  they  had  been 
made,  it  would,  perhaps,  be  seen  that  some  $5,000,000  of 
the  proceeds  of  loans  had  been  paid  over  in  the  form  of 
the  bank's  own  notes,  that  $2,000,000  had  been  paid  in 
specie  and  legals,  that  $2,000,000  had  been  advanced 
through  giving  credit  on  the  books  as  new  deposits  for 
account  of  farmers  and  others,  and  that  $2,000,000  of 
proceeds  had  been  applied  voluntarily  to  the  repayment  of 
existing  loans. 

THE  PROFIT  IN  THE  NOTE  CIRCULATION 

This  illustration  shows  clearly  how  the  people  of  the 
Northwest  benefit  from  the  note-issuing  powers  of  the 
Bank  of  Minnesota.  There  are  plenty  of  people  in  the 
United  States  who  believe  that  a  right  of  issue,  such  as 
that  described,  is  nothing  more  than  a  tremendous  profit- 
making  opportunity  for  the  banks.  They  regard  the 
right  to  issue  notes  to  serve  as  currency  as  something 
belonging  naturally  to  the  Government,  and  they  think 
the  Government  is  entitled  to  all  the  profit  therefrom. 
As  I  said  before,  I  do  not  aspire  to  settle  the  question  as 
to  where  this  right  belongs,  but  it  seems  to  me  abun- 


A    RATIONAL    BANKING    SYSTEM 

dantly  clear  that  when  the  currency  is  provided  by 
strong  commercial  banks  of  the  character  of  the  hypo- 
thetical Bank  of  Minnesota,  the  mercantile  interests  of 
the  country  benefit  to  a  much  larger  extent  than  they 
could  hope  to  benefit  under  a  system  wherein  the  cur- 
rency was  supplied  by  the  Government.  I  concede  that 
the  Bank  of  Minnesota  makes  a  satisfactory  profit  through 
its  ability  to  pay  its  own  notes  into  general  circulation 
up  to  a  maximum  of  $12,000,000;  but  it  yet  remains  true 
that  the  borrowing  customers  of  the  bank  reap  a  con- 
siderable gain  from  its  exercise  of  this  franchise.  What 
the  bank  gains  may  be  summed  up  as  follows: 

Assuming  that  its  average  circulation  for  the  year  is 
$9,000,000,  that  might  be  disposed  in  this  way: 

Five  per  cent,  deposit  in  the  Redemption  Fund $    450,000 

Twenty  per  cent,  reserve  carried  in  cash 1,800,000 

Ten  per  cent,  reserve  carried  as  call  loans 900,000 

Five  per  cent,  reserve  carried  as  bank  balances 450,000 

Sixty  per  cent,  carried  as  mercantile  discounts 5,400,000 

$9,000,000 

The  annual  revenue  derived  therefrom  might  be: 

On  the  balance  in  Redemption  Fund  at  2  per  cent $  9,000 

On  cash nil 

On  call  loans  at  2^  per  cent 22,500 

On  international  bank  balances nil 

On  mercantile  discounts,  5  per  cent 270,000 

$301,500 

The  annual  charges  against  this  gross  income  might  be : 

Plates  and  printing  new  notes $  20,000 

Express  and  other  charges  pertaining  to  distribution  of 
notes,  and  redemption  of  other  banks'  notes  received 

over  the  counter 52,000 

Clerk  hire  and  other  expenses  attributable  to  note  circu- 
lation       87,000 

$159,000 

The  net  gain  on  the  notes  in  circulation  might  thus  be 
$142,500.     To  it  should  be  added  the  saving  of  interest 

146 


ANOTHER  HYPOTHETICAL  BRANCH  BANK 

on  that  portion  of  the  till  money  carried  in  the  form  of 
the  bank's  own  notes.  This  might  amount  to  another 
$80,000,  making  the  gross  gain  to  the  bank  $222,500,  or 
2.47  per  cent,  on  its  average  outstanding  issues. 

How  THE  BORROWERS  BENEFIT 

Next  let  us  see  how  the  commercial  community  in  the 
Northwest  benefits  from  the  exercise  of  note-issuing 
functions  by  the  Bank  of  Minnesota.  We  have  seen  that 
the  bank  makes  about  half  of  its  total  advances  to  the 
grain  trade  in  the  form  of  its  own  notes.  So  it  is  quite 
plain  that  if  it  were  shorn  of  its  issue  rights  its  ability 
to  extend  accommodation  to  its  customers  during  the 
grain  season  would  be  seriously  curtailed.  If  it  is  pre- 
sumed that  its  advances  of  $2,000,000  in  specie  and  legals 
represented  all  that  it  was  prepared  to  advance  in  that 
form,  and  that  it  was  not  possible  to  increase  the  pro- 
portion of  $4,000,000  advanced  through  book  credits 
given  to  farmers  and  others,  it  follows  necessarily  that  at 
the  beginning  of  the  season  the  bank  could  only  under- 
take to  grant  credits  to  the  grain  trade  for  $6,000,000 
instead  of  the  $11,000,000  which  it  readily  undertakes 
when  possessing  its  issue  powers. 

Possibly  it  would  be  quite  safe  to  apply  this  reasoning 
to  Canada,  and  to  say  that  because  of  their  extensive 
issue  rights  the  ability  of  the  chartered  banks  to  lend 
to  the  grain  trade  is  practically  doubled.  What  this 
means  to  the  trade  and  to  business  men  generally  may  be 
easily  imagined.  They  get  their  accommodation  with 
much  less  trouble,  and  they  pay  less  for  it.  In  other 
words,  they  are  able  to  finance  a  larger  business  at  a 
lower  expense  ratio.  There  is  reason  to  believe  that  the 
interest  rate  in  Minneapolis  would  be  quite  J  per  cent, 
lower  under  a  system  of  this  kind.  In  the  smaller 
country  places  throughout  the  Northwest  it  ought  to  be 
fully  i  per  cent,  or  i  J  per  cent,  lower.  Taking  it  at  f  per 

147 


A    RATIONAL    BANKING    SYSTEM 

cent.,  and  applying  that  to  an  aggregate  of  $100,000,000 
of  grain  loans,  running  for  six  months,  the  annual  saving 
would  amount  to  $375,000  in  this  one  item  alone,  to  say 
nothing  of  the  extra  profits  to  be  made  by  the  grain  men 
and  merchants  through  their  ability  to  get  larger  credits 
without  unnecessary  bother.  It  is  to  be  remembered 
that  the  saving  in  interest  here  referred  to  results  merely 
from  the  expansive  circulating  power  coming  into  use  in 
the  fall  and  early  winter.  A  much  larger  saving  in  in- 
terest and  a  larger  opportunity  for  profit-making  by  the 
mercantile  public  would  attach  to  the  steady  use  by  the 
banks  of  their  note-circulating  powers  through  the  rest 
of  the  year.  Unless  I  am  altogether  astray  in  my  reason- 
ing it  certainly  would  be  an  unwise  proceeding  to  give  a 
monopoly  of  note  issue  to  a  central  bank,  thus  blocking 
the  way  for  giving  to  the  ordinary  banks  at  some  time  in 
the  future  rights  of  issue  which  would  be  of  inestimable 
value  to  their  borrowing  customers. 

ABSORBING  SMALL  LOCAL  BANKS 

It  is  to  be  remembered  that  the  Bank  of  Minnesota  was 
formed  originally  by  a  combination  of  banks  operating 
in  the  Northwest.  Its  directors  are  prominent  business 
men  of  the  twin  cities,  and  it  has  followed  a  policy  of 
absorbing  other  banks,  and  of  opening  branches  in  many 
places  that  had  no  banking  facilities  prior  to  its  coming. 
It  will  be  interesting  to  note  some  of  the  principal  differ- 
ences that  would  strike  the  banker  of  a  Northwestern 
country  town  or  village  on  the  occasion  of  the  absorption 
of  his  local  bank  by  the  Minneapolis  institution.  Unless 
there  was  some  good  reason  for  dispensing  with  his  services 
he  would,  of  course,  be  retained  as  manager  of  the  branch. 

On  the  transformation  of  his  local  bank  into  a  branch 
of  the  Bank  of  Minnesota  the  country  banker  in  the 
Northwest  would  first  be  struck  with  the  fact  of  the 
removal  of  the  hard  and  fast  limit  to  the  gross  amount 

148 


ANOTHER  HYPOTHETICAL  BRANCH  BANK 

of  his  loans  and  discounts.  While  doing  business  in  the 
independent  way  he  always  had  to  keep  an  eye  on  this 
limit.  To  do  so  will  be  no  longer  necessary.  All  he  need 
do  now  is  to  convince  the  general  manager  in  Minneapolis 
that  the  loans  he  proposes  to  make  are  sound  and  de- 
sirable; and  when  he  does  that  it  will  not  matter  if  the 
balance  of  his  loans  and  discounts  rises  to  double  the 
highest  figure  ever  reached  while  the  bank  was  operated 
as  an  isolated  unit. 

EFFECTS  OF  THE  CHANGE  OF  FORM 

Next  the  banker  would  find,  as  I  remarked  in  Chapter 
IV,  that  he  was  relieved  from  the  whole  load  of  worry 
and  care  about  the  reserve  against  liabilities. 

Thirdly,  he  would  notice  that  the  bank  inspired  a 
greater  respect  than  formerly  among  the  customers  and 
townspeople. 

The  townspeople  and  farmers  would  also  be  struck 
with  some  important  changes.  So  far  as  the  borrowers 
were  concerned,  they  would  find  that  when  they  were 
able  to  give  the  required  security  they  might  borrow  any- 
thing in  reason  at  rates  nearly  as  low  as  those  paid  by 
the  best  merchants  in  the  cities.  (In  my  experience  I 
have  known  small  country  towns  in  Canada  where  the 
leading  merchants  had  a  discount  rate  fully  as  low  as 
that  paid  by  the  directors  of  the  bank,  and  these  country 
customers,  though  their  business  was  small,  actually  had 
better  terms,  from  the  bank,  in  the  way  of  commissions 
charged  by  it  for  its  services,  than  the  directors  enjoyed. 
This  peculiar  state  of  affairs  results  from  the  keen  com- 
petition prevailing  at  branch  points.) 

LOCAL  BORROWERS  AND  THE  HEAD  OFFICE 

I  concede  that  in  one  respect  the  metamorphosis  into 
a  branch  might  result,  on  certain  occasions,  in  incon- 
veniencing those  borrowers  who  experience  a  sudden  need 
for  a  bank  loan  to  carry  through  a  transaction  presenting 

149 


A    RATIONAL    BANKING    SYSTEM 

itself  unexpectedly  to  them.  Dealing  with  a  purely  local 
bank  a  borrower  of  this  kind  might  present  his  application 
or  request  and  have  it  acted  upon  the  same  day.  If  it 
proved  impracticable  to  convene  a  meeting  of  the  board 
to  authorize  the  advance,  one  or  two  of  the  principal  di- 
rectors could  probably  be  seen  and  a  tacit  authoriza- 
tion secured.  With  the  branch  bank,  on  the  other  hand, 
the  manager  would  not  have  the  requisite  authority  for 
granting  the  credit  if  the  amount  exceeded  a  very  mod- 
erate sum.  It  would  be  necessary  to  refer  the  transac- 
tion to  the  head  office  and  possibly  several  days,  perhaps 
weeks,  might  elapse  before  the  credit  would  be  available. 
Besides  subjecting  him  to  inconvenience  this  delay  might 
deprive  the  customer  of  the  opportunity  of  undertaking 
the  transaction  and  cause  him  to  miss  what  he  considered 
was  a  sure  or  certain  profit. 

But,  conceding  that  in  this  respect  the  change  would  be 
disliked  by  a  number  of  people,  it  can,  nevertheless,  be 
said  that  in  actual  practice  the  passing  from  the  locality 
of  the  credit-granting  power  would  be  attended  by  less 
inconvenience  and  trouble  than  might  be  supposed. 
There  would  be,  though,  a  real  difference  in  the  position 
of  those  local  parties  who  had  been  getting,  under  the  old 
regime,  specially  good  treatment  by  reason  of  their  po- 
litical, social,  or  religious  connection  with  the  local  di- 
rectors or  officers.  Under  the  branch  system  their  ap- 
plications would  be  passed  upon,  not  sympathetically  by 
political  partisans  or  brother  churchmen,  but  by  cold 
financial  experts  who  invariably  demanded  to  be  shown 
a  record  of  cleanness  and  square  dealing,  of  reasonable 
ability  in  business,  and  of  a  necessary  surplus  of  mer- 
chantable assets  over  floating  liabilities  before  allowing 
credits. 

LOCAL  MANAGER  HAS  STRONG  INFLUENCE 

So  far  as  those  borrowers  are  concerned  who  are  accus- 
tomed to  stand  upon  their  own  feet,  the  change,  even  in 

150 


ANOTHER  HYPOTHETICAL  BRANCH  BANK 

the  case  of  unexpected  occasional  transactions  like  the 
one  referred  to,  need  not  be  awkward  nor  inconvenient. 
True,  the  branch  manager  is  fettered,  in  a  sense,  and  he 
has  not  the  credit-granting  power  except  for  small  sums; 
but  if  he  is  a  good  man  he  will  have  a  powerful  voice 
at  the  head  office,  and  to  get  his  approval  of  a  loan  would 
be  a  long  step  toward  getting  it  authorized  by  the  head 
office.  It  should  be  borne  in  mind,  also,  that  all  business 
men  conducting  enterprises  of  any  magnitude  would  be 
encouraged,  under  the  branch  system,  to  arrange  at  the 
beginning  of  each  season  or  year  for  a  line  of  credit  to 
continue  in  force  during  the  whole  season  or  year.  It 
would  be  quite  easy  for  all  parties  having  the  requisite 
standing  and  credit  to  make  timely  provision,  when  ar- 
ranging these  credits,  for  the  handling  of  such  special 
deals  or  transactions  as  might  present  themselves  un- 
expectedly in  the  course  of  the  season.  And  of  course, 
if  the  deals  are  provided  for  in  the  credits,  all  that  is 
necessary  when  the  occasion  presents  itself  is  to  go  to 
the  branch  and  hand  in  the  note  or  notes  represent- 
ing the  sum  required.  This  process  is  more  expedi- 
tious even  than  that  which  is  usually  followed  under 
the  present  system  whereby  the  local  directors  are 
gathered  or  seen  and  their  consent  to  a  special  loan 
gained. 

And,  even  when  an  experience  of  the  kind  suddenly 
happens  to  a  borrower  in  good  credit  who  has  not  pro- 
vided for  it  in  his  regular  credit,  it  does  not  necessarily 
mean  that  he  cannot  get  prompt  action  when  dealing  with 
the  branch  bank.  The  transaction  may  be  arranged  in 
an  hour  by  means  of  the  telegraph.  Or  it  may  happen 
that  the  branch  manager  is  strong  enough  with  the  head 
office,  sure  enough  of  the  borrower's  position  and  respon- 
sibility, to  give  him  the  credit  without  waiting  for  the 
executive  sanction,  or  in  confident  knowledge  that  the 
advance  will  be  authorized  as  a  matter  of  course  on  its 
being  presented  to  the  general  manager. 


A    RATIONAL    BANKING    SYSTEM 
LOCAL  INTERESTS  WOULD  BE  RESPECTED 

It  is  nearly  always  assumed  by  the  opponents  of  branch 
banks  that  local  borrowers  would  prefer  altogether  to 
negotiate  for  their  banking  accommodation  with  banks 
owned  and  operated  by  local  people  rather  than  with 
banks  owned  by  a  body  of  stockholders  mostly  living  in 
other  places  and  managed  by  officers  resident  in  a  distant 
centre.  In  dealing  with  this  assumption  I  would  point 
out  that  in  most  towns  there  are  a  number  of  local  bor- 
rowers who  would  be  very  glad  to  have  the  opportunity  of 
transacting  business  with  a  bank  of  undoubted  strength 
which  was  not  at  all  involved  in  the  local  politics.  For 
example,  there  might  be  a  number  of  the  small  traders 
who  dislike  having  their  inmost  financial  affairs  passed 
upon  by  local  parties  some  of  whom  might  be  hard  com- 
petitors in  a  business  way.  A  small  retailer  would  hardly 
be  disposed  to  apply  for  credit  at,  and  place  himself  in 
the  power  of,  a  bank  on  the  board  of  which,  perhaps,  a 
dominating  place  was  occupied  by  a  local  departmental 
store  proprietor  whom  he  believed  to  be  trying  to  crush 
him.  People  holding  these  views — and  they  would  be 
found  chiefly  among  the  smaller  tradesmen — would  be 
more  comfortable  and  more  disposed  to  use  the  bank's 
facilities  if  their  financial  business  was  looked  after  and 
their  secrets  guarded  by  a  professional  owing  no  allegiance 
to,  and  free  from  the  influence  of,  all  local  parties  and 
interests. 


IX 

WALL   STREET   DOMINATION 
OTHER  HYPOTHETICAL  BRANCH  BANKS 

IT  will  hardly  be  necessary  to  describe  at  length  the 
operations  of  other  hypothetical  branch  banks  which, 
while  being  of  the  same  type  as  the  Bank  of  Massachusetts 
and  the  Bank  of  Minnesota,  would  serve  different  parts 
of  the  country.  I  might  describe  the  operations  of  a 
Bank  of  Georgia,  devoting  a  large  share  of  its  attention 
to  the  production,  marketing,  and  manufacture  of  cotton; 
of  a  Southwestern  Bank,  heartily  engaged  in  aiding  the 
people  of  the  Southwestern  states  in  the  carrying  on  of 
various  lines  of  industry  and  trade  prevalent  in  that 
section  of  the  country;  of  a  Bank  of  Illinois,  with  head 
office  in  Chicago  and  branches  scattered  profusely  in  the 
Middle  West;  of  a  Bank  of  Virginia,  a  Bank  of  California, 
and  so  on.  For  titles  the  different  states,  the  great 
cities,  the  various  industries  and  trades,  the  names  of 
historic  or  wealthy  individuals  and  families,  would  fur- 
nish some  excellent  material.  It  should  be  borne  in 
mind  that  a  so-called  Bank  of  Illinois  would  have  no 
monopoly  of  the  business  in  that  great  state;  it  would 
be  called  upon  to  meet  the  competition  of  dozens  of  other 
banks  of  the  same  kind  as  itself.  Possibly  it  would  not 
be  able  to  count  upon  having  a  monopoly  of  business  at 
any  point  or  place  in  Illinois  or  elsewhere,  except  in  those 
very  small  villages  in  which  it  had  established  itself  be- 
fore any  competitors  appeared,  and  which  furnished  a 
bare  subsistence  for  but  one  bank. 


A    RATIONAL    BANKING    SYSTEM 
ATTITUDE  OF  THE  STATE  LEGISLATURES 

Perhaps  it  will  be  argued  that  the  legislators  of  certain 
of  the  states,  even  if  they  do  ultimately  bring  themselves 
to  permit  branch  banks  to  operate  within  the  state  borders, 
will  be  disposed  to  prohibit  or  to  interpose  obstacles  in  the 
way  of  the  establishment  within  their  state  of  branches 
of  banks  belonging  to  other  states,  or  to  other  sections 
of  the  country,  with  the  notion  that  the  interests  of  the 
state  will  be  best  served  by  banks  of  its  own  creation 
and  owned  by  its  own  citizens.  But  a  moment's  con- 
sideration will  show  that  this  notion  is  entirely  erroneous. 
Should  any  state  follow  that  policy  it  would,  of  course, 
benefit  the  local  banks  in  some  ways.  They  would  be 
shielded  from  some  strong  outside  competition,  and  per- 
haps they  could  maintain  their  lending  rates  at  a  higher 
level.  However,  it  is  clear  that  the  benefit  which  the 
local  banks  gained  in  that  way  would  be  largely  at  the 
expense  of  the  business  people  of  their  own  state.  It 
would  be  in  the  interest  of  every  merchant,  manufacturer, 
farmer,  and  every  individual  or  company  having  use  for 
bank  loans,  and  in  the  interest  of  all  who  owned  funds 
available  for  depositing,  that  there  be  in  the  state  as 
large  a  representation  of  strong  banking  institutions  as 
the  state  could  attract.  The  more  banks  there  were 
from  outside  states  the  keener  would  the  competition  be, 
the  better  would  be  the  terms  on  which  the  business  men 
could  borrow,  and  the  more  completely  would  the  rural 
districts  be  covered  with  banking  offices. 

EVOLUTION  OP  Two  CANADIAN  LOCAL  BANKS 

There  is  an  interesting  feature  of  the  development  of 
the  branch  system  in  Canada  which  bears  directly  on 
this  phase  of  the  subject.  Among  the  large  institutions 
of  the  Dominion  are  two  banks  which  were  founded  and 
originally  owned  in  the  Province  of  Nova  Scotia.  At  an 

154 


WALL    STREET    DOMINATION 

early  stage  in  their  careers  both  had  extended  their  opera- 
tions into  the  neighboring  Province  of  New  Brunswick. 
Until  toward  the  end  of  the  last  century,  however,  their 
operations  in  Canada  were  mostly  confined  to  the  two  mar- 
itime provinces  mentioned.  About  ten  years  ago  both 
broke  into  Ontario  and  Quebec  through  opening  branches 
in  Toronto  and  Montreal.  This  move  they  followed  by 
establishing  branches  at  other  points  in  those  two  prov- 
inces; and  one  of  them  began  some  time  ago  to  push  its 
branch  system  into  British  Columbia  and  western 
Canada.  The  entry  of  the  other  into  western  Canada 
occurred  more  recently — though  it  should  be  said  that 
it  had  a  branch  in  Winnipeg  in  the  early  "eighties,"  but 
withdrew  from  that  field  as  a  result  of  losses  suffered  in 
the  collapse  of  the  Manitoba  land  boom  in  1884.  These 
banks  have  not  confined  their  attention  to  Canada. 
Both  are  in  Newfoundland  and  in  the  West  Indies,  where 
they  transact  a  large  and  profitable  business.  Finally 
each  has  its  agency  in  New  York  City,  and  one  has  a 
branch  in  London.  After  the  movement  of  expansion 
had  been  under  way  for  a  time,  both  banks  found  Halifax 
unsuitable  and  inconvenient  as  a  head  office.  So  one 
selected  Montreal,  the  other  Toronto,  as  the  home  for 
the  executive  management. 

INSTITUTIONS  OF  NATIONAL  IMPORTANCE 

Starting  as  a  sectional  or  provincial  concern,  each  of 
these  banks  has  enlarged  its  scope  and  its  territory,  and 
now  fairly  takes  rank  as  a  national  institution.  One  has 
done  this  and  retained  a  purely  Nova  Scotian  board  of 
directors.  The  other  has  a  board  made  up  of  four  gentle- 
men of  Halifax,  four  of  Montreal,  and  three  of  Winnipeg. 
The  majority  on  both  boards  consists  of  men  devoting 
themselves  to  commercial  or  industrial  business  rather 
than  to  finance. 

Bearing  these  circumstances  in  mind  one  may  easily 


A    RATIONAL    BANKING    SYSTEM 

understand  that  the  point  of  view  and  the  capacity,  both 
of  the  executive  and  of  the  employees,  would  broaden  as 
the  banks  themselves  broadened.  Every  one  connected 
with  a  bank  of  this  type  would  be  apt  to  think  broadly 
on  financial  questions.  The  executive  of  such  a  bank 
can  usually  be  counted  upon  to  take  patriotic  action 
whenever  the  country  is  threatened  with  a  crisis.  Yet  it 
should  not  be  supposed  that  these  banks,  on  widening 
their  scope  of  action,  became  cold  or  forgetful  in  regard 
to  the  interests  of  the  particular  province  in  which  they 
originated.  The  bulk  of  the  stock  is  still  held  in  the 
maritime  provinces.  The  extension  abroad  and  into  the 
other  parts  of  Canada  has  the  effect  of  enabling  those 
Nova  Scotia  owners  to  draw  a  yearly  revenue  from  the 
commercial  and  industrial  activity  prevailing  in  the 
other  provinces  and  outside  the  country. 

WIDE  SCOPE  OP  THE  CANADIAN  BANKS 

These  two  Nova  Scotia  banks  have  been  mentioned 
particularly  because  their  history  constitutes  a  good 
example  of  local  banks  starting  in  a  small  province  at 
one  end  of  the  Dominion  and  spreading  over  the  whole 
land.  Most  of  the  important  institutions  in  Ontario  and 
Quebec  have  spread  east  and  west.  Everybody  knows 
how  world- wide  is  the  business  of  the  Bank  of  Montreal, 
and  how  the  Canadian  Bank  of  Commerce  also  covers 
every  part  of  Canada,  and  how  it  participates  in  financing 
the  business  of  certain  parts  of  the  United  States  as  well. 
Enough  details  have  been  given  to  show  how  natural  it 
would  be  for  branch  banks  established  in  one  state  of 
the  American  Union  to  spread  into  other  states  near  by, 
and  into  other  parts  of  the  country.  But  they  would 
not  thereby  lose  their  particular  usefulness  for  the  home 
state  or  section.  Most  of  the  larger  banks,  no  matter 
what  section  of  the  country  they  belonged  to,  would 
find  it  necessary  or  advantageous  to  have  a  branch  in 

156 


WALL    STREET    DOMINATION 

New  York  City  similar  to  the  New  York  City  branch  of 
the  Bank  of  Minnesota. 

WALL   STREET'S   CONTROL   OVER  THE   NATIONAL 
RESOURCES 

It  is  now  in  order  to  discuss  the  probable  effect  of  this 
movement  on  the  matter  of  Wall  Street  domination  or 
control  over  the  banking  resources  of  the  nation.  There 
are  a  great  many  people  in  the  United  States  who,  when- 
ever branch  banks  are  suggested  as  a  remedy  for  existing 
evils,  shiver  with  apprehension  over  the  prospect  of  the 
branch  system  being  used  as  a  means  of  extending  or 
enlarging  Wall  Street's  control  over  the  national  resources 
of  cash.  They  imagine  that  as  soon  as  the  laws  per- 
mitted the  establishment  of  branches  on  satisfactory 
terms  the  various  Wall  Street  cliques,  which  now  control 
a  number  of  the  large  banks  in  New  York  City,  would 
immediately  proceed  to  possess  themselves  of  the  bank- 
ing resources  of  other  cities,  and  of  the  towns  and  villages ; 
and  that  finally  they  would  have  an  iron  grip  on  the 
banking  business  of  the  country.  One  need  have  no 
hesitation  in  saying  that  such  ideas  are  unwarranted. 
I  have  already  ventured  to  suggest  that  the  measure  of 
control  over  the  banking  resources  of  the  United  States 
enjoyed  by  those  Wall  Street  capitalists  would  be  les- 
sened, not  increased,  by  the  institution  of  branch  bank- 
ing; and  I  shall  now  indicate  further  reasons  why  it 
appears  that  that  will  be  so. 

In  the  first  place  let  us  examine  the  expansive  capac- 
ity, in  the  way  of  acquiring  branches,  of  the  great  New 
York  banks  which  are  so  much  feared  and  suspected 
throughout  the  country  districts.  In  what  manner 
would  their  branch  extension  take  place?  It  would  be 
a  mistake  to  suppose  that  they  would  have  it  in  their 
power  to  acquire  all  the  interior  banks  which  now  use 
them  as  correspondents  or  reserve  agents.  Many  country 

157 


A    RATIONAL    BANKING    SYSTEM 

banks  carrying  balances  in  the  great  metropolitan  banks 
do  so  solely  because  of  the  size  and  strength  of  the  city 
institutions.  The  country  bankers  wish  to  have  their 
funds  in  the  safest  depository  available;  therefore,  many 
of  them  select  the  largest  banks  to  act  as  correspondents 
and  reserve  agents.  But  it  does  not  follow  that  any  par- 
ticular interior  bank  would  be  favorable  to  these  same 
large  metropolitan  institutions  when  it  came  to  the 
point  of  deciding  the  question  as  to  what  bank  was  to 
absorb  and  operate  it  as  a  branch.  The  interior  bankers 
would  be  much  more  likely  to  give  the  preference  to  some 
bank  or  banks  in  their  own  neighborhood  or  section. 

CHICAGO'S  STRENGTH  IN  COMMERCIAL  BANKING 

I  confess  that  my  own  opinion  is  that  on  the  institution 
of  favorable  laws  regarding  branch  banking  the  Chicago 
banks  would  be  more  active  than  the  New  York  institu- 
tions in  extending  their  branch  systems  into  the  country. 
My  chief  reason  for  so  thinking  is  that  it  will  be  commer- 
cial business  that  the  branches  will  be  obliged  to  trans- 
act, and  the  great  Chicago  banks  apparently  give  a  large 
share  of  their  attention  to  carrying  commercial  accounts. 
One  hears  occasionally  of  the  absorption  of  some  com- 
mercial bank  in  the  down-town  district  of  New  York  by 
interests  devoting  themselves  particularly  to  financial 

1  banking.  And  in  that  sense  financial  banking  appears 
to  be  on  the  increase  in  New  York  City,  and  commercial 
banking  appears  to  be  on  the  decrease.  A  bank  that 
preferred  to  devote  itself  chiefly  to  financial  banking,  if 
it  had  liberty  to  establish  branches  wherever  it  pleased, 
would  hardly  go  outside  the  great  cities.  So  it  is  to  be 
expected  that  each  one  of  the  great  financial  banks  of 
New  York  would  endeavor  to  acquire  a  banking  institu- 
tion in  each  of  the  principal  cities  to  act  as  its  branch. 
It  is  well  known  that  some  of  the  New  York  institutions 
already  have  control,  through  stock  ownership,  of  local 

158 


WALL    STREET    DOMINATION 

banks  in  other  cities  and  in  other  parts  of  the  country; 
and  doubtless  these  controlled  banks  would  be  operated 
as  branches  as  soon  as  it  was  legal  and  expedient  to  do  so. 

THE  BRANCHES  OP  FINANCIAL  BANKS 

One  can  scarcely  suppose  that  the  leading  banks  now 
operating  in  Chicago,  Philadelphia,  Boston,  St.  Louis, 
San  Francisco,  Minneapolis,  and  Kansas  City,  those  at 
least  which  are  now  really  independent,  would  be  dis- 
posed to  listen  favorably  to  proposals  of  absorption 
formulated  to  them  by  the  great  financial  banks  of  New 
York.  Those  leading  local  banks  would  be  naturally 
inclined  to  develop  branch  systems  of  their  own  rather 
than  to  become  mere  branches  of  New  York  institutions. 
Their  directors  are  men  of  great  prominence  in  the  com- 
mercial world,  and  they  are  animated  by  a  strong  local 
sentiment.  As  every  one  of  the  cities  named  is  admirably 
situated  for  a  banking  head  office,  it  is  extremely  probable 
that  every  one  would  become  the  seat  of  government  for 
a  number  of  strong  and  important  branch  banks. 

So  the  purely  financial  banks  of  New  York,  in  securing 
representation  for  themselves  in  the  other  principal  cities, 
might  have  to  be  content  with  acquiring  or  absorbing 
banks  with  a  secondary  standing  in  point  of  size;  and 
in  some  cities  they  might  find  it  necessary  or  desirable 
to  engage  a  manager  and  staff  and  build  up  a  business 
from  nothing.  But  it  may  be  assumed  that  a  branch 
maintained  by  a  New  York  financial  bank  in  an  interior 
city  would  be  obliged  to  do  considerable  commercial  dis- 
counting whether  its  executive  desired  to  do  so  or  not. 
Unless  it  did  so  it  would  find  it  extremely  difficult  to  get 
or  keep  a  fair  share  of  the  purely  financial  business.  The 
branches  of  a  financial  bank  would  hardly  be  found  in  the 
smaller  cities  and  towns.  If  any  of  them  did  penetrate 
that  field  they  would  be  obliged  to  do  a  full  business  in 
commercial  discounting.  For  a  bank  of  that  kind  to  go 

159 


A    RATIONAL    BANKING    SYSTEM 

into  a  small  place  and  attempt  to  do  nothing  but  collect 
deposits  would  be  to  make  itself  ridiculous. 

THE  GREAT  WALL  STREET  BANKS 

It  therefore  appears  likely  that  the  branches  of  the  so- 
called  Wall  Street  banks  would  be  found  only  in  the 
large  centres  and  that  they  would  there  do  a  broader, 
more  catholic  business  than  they  now  do  in  New  York. 
Quite  probably,  with  their  branches,  they  would  be  able 
to  perform  their  extremely  useful  functions  in  a  manner 
even  more  efficiently  than  they  do  to-day.  It  is  also 
likely  that  the  amount  of  resources  in  the  possession  of 
the  greatest  of  them  would  rise  to  proportions  consider- 
ably larger  than  they  presently  possess ;  but  their  strength 
and  importance  would  not  enable  them  to  dominate  the 
important  branch  banks  of  the  South,  the  West,  and  the 
East,  as  they  now  dominate  hundreds,  yes  thousands, 
of  little  local  banks  throughout  the  country. 

A  NEW  BALANCE  OF  POWER 

One  way  in  which  the  development  of  the  branch  sys- 
tems in  the  different  parts  of  the  United  States  might  be 
\expected  to  lessen  Wall  Street's  domination  would  be 
through  raising  in  each  section  a  number  of  important 
banking  powers.  Instead  of  there  being  a  few  really 
great  banks  in  New  York,  Chicago,  and  one  or  two  other 
cities,  and  no  other  banks  of  much  importance  anywhere 
else,  there  would  be  important  banks  in  every  section. 
At  present  the  heads  of  the  leading  banks,  from  their  high 
position,  look  out  upon  a  multitude  of  tiny  units.  Under 
the  branch  system  they  would  look  out  upon  a  number  of 
institutions  perhaps  as  large,  as  powerful,  and  as  well 
organized  as  their  own  banks. 

In  dealing  with  the  Bank  of  Minnesota  something  was 
said  as  to  how  that  bank  carried  its  New  York  cash  and 

1 60 


WALL    STREET    DOMINATION 

loans  in  its  own  possession.  If  we  may  imagine,  then, 
that  there  were  in  the  United  States  some  two  hundred 
branch  banks  with  an  average  of  one  hundred  and  twenty 
branches  to  each  bank,  and  each  maintaining  a  branch  in 
New  York  City,  what  a  change  there  would  be  in  regard 
to  Wall  Street's  domination  over  the  cash  resources  of 
the  country. 

STANDARD  OIL  AND  MORGAN  BANKS 

It  is  commonly  believed  that  the  so-called  Standard  Oil 
and  Morgan  interests  control  or  influence  the  operations 
of  two  groups  of  banks  comprising  the  largest  and  most 
powerful  in  New  York  City.  As  everybody  knows,  the 
bar  Vs  comprised  in  these  two  groups  carry  the  balances 
of  a  very  large  number  of  interior  banks.  They  have  in 
their  hands  the  greater  part  of  the  total  balances  carried 
in  New  York  by  the  interior  banks.  For  these  huge  sums 
received  from  their  correspondent  banks  they  merely  give 
credit  on  their  books,  and  then  quite  properly  regard  the 
funds  as  their  own.  Nothing  except  policy  and  the 
exercise  of  self-restraint  on  their  part  need  prevent  the 
high  officers  from  lending  a  large  part  to  themselves  or 
their  friends  for  carrying  on  stock  market  campaigns. 
Or  they  might,  as  their  enemies  have  observed,  lend  the 
funds  to  the  brokers  for  carrying  a  public  speculation  in 
stocks,  and  then  call  them  in  again  with  the  object  of 
making  stocks  fall,  so  that  they  themselves  could  pur- 
chase cheaply. 

It  is  not  only  the  balances  carried  on  deposit  by  the 
country  banks  that  they  have  in  their  control,  for,  as 
mentioned  before,  they  also  act  as  agents  for  interior 
bankers  in  placing  loans  at  call  and  on  time.  The  coun- 
try banks  send  them  the  money ;  they  find  the  borrowers, 
and  hold  the  securities.  These  loans  also  they  might, 
if  they  were  not  restrained  by  honor  or  policy,  use  to  a 
certain  extent  to  enrich  or  benefit  themselves  or  their 

161 


A    RATIONAL    BANKING    SYSTEM 

associates.  Thus  in  the  aggregate  these  two  groups  of 
banks  have  a  strong  grip  on  an  enormous  amount  of 
banking  resources. 

INTERIOR   BANKS   WOULD  CONTROL   THEIR  OWN    NEW 
YORK  BUSINESS 

Now  attend  to  this  description  of  what  might  happen 
if  the  banking  business  of  the  country  were  transferred 
to  a  few  large  branch  banks.  We  have  seen  that  the 
Bank  of  Minnesota  established  its  branch  in  New  York 
and  that  its  New  York  manager  and  staff  assumed  charge 
of  its  reserve  of  specie,  legals,  and  call  loans  carried  in  that 
city.  Thus  the  balances  and  call  loans  of  one  hundred 
and  fifty  banking  offices  mostly  situated  in  the  Northwest 
were  taken  from  the  control  of  large  New  York  banks 
and  handed  to  the  Bank  of  Minnesota's  branch,  which,  of 
course,  is  dominated  and  regulated  from  Minneapolis. 
Similarly,  half  a  dozen  or  more  other  large  banks  owned 
in  the  Northwest,  each  with  its  quota  of  one  hundred  and 
odd  branches,  would,  through  establishing  New  York 
offices,  take  their  reserves  and  their  loans  into  their  own 
possession.  The  same  result  might  be  expected  as  re- 
gards the  great  branch  banks  owned  in  the  South,  the 
Southwest,  the  Middle  West,  and  on  the  Pacific  Coast. 
Each  one  of  the  important  institutions  would  arrange  to 
have  a  large  part  of  its  reserve  in  its  own  possession  and 
at  the  same  time  have  it  in  New  York,  where  it  was  most 
needed.  Thus,  there  is  fair  reason  to  suppose  that  in 
this  way  branch  banking  would  materially  lessen  the 
extent  of  Wall  Street's  control  over  the  banking  reserves 
of  the  nation,  and  that  they  would  be  carried  in  a  more 
scientific  manner  than  at  present.  Also,  as  pointed  out 
before,  each  section  would  have  a  respectable  concentra- 
tion of  banking  power  to  serve  as  counterpoise  to  the  ag- 
gregations of  banking  capital  existing  at  New  York,  Chi- 
cago, and  Boston  which  now  overshadow  the  whole  land. 

162 


WALL    STREET    DOMINATION 
CONVERSIONS  OF  BANK  BALANCES  INTO  CASH 

Practical  men  may  object  that  such  a  large  conversion 
of  bank  balances  into  hard  cash  as  is  here  described 
could  not  be  carried  out.  On  September  i,  1910,  the 
national  banks  of  New  York  City  held  deposits  of  other 
banking  institutions  amounting  to  $618,056,548,  and 
there  were  in  addition  the  banking  deposits  held  by  the 
great  trust  companies  and  state  banks  in  the  metropolis 
to  consider.  The  answer  is  that  the  independent  banks 
could  not  be  converted  into  branches  in  masses,  as  I  have 
here  assumed.  In  actual  practice  the  process  of  absorp- 
tion of  local  banks  would  probably  be  slow.  In  the  case 
of  each  institution,  no  matter  how  small  it  was,  nego- 
tiations would  be  necessary,  and  in  some  cases  they  would 
be  protracted.  Then  at  first  there  would,  doubtless,  be 
quite  a  number  of  branch  banks  electing  to  do  without  a 
branch  in  New  York  City.  This  move  they  would  con- 
sider after  their  branch  systems  had  reached  certain  pro- 
portions. In  the  mean  time  they  would  probably  employ 
the  large  financial  banks  of  the  metropolis  as  their  corre- 
spondents and  reserve  agents.  But  it  may  be  assumed, 
if  the  branch  system  is  made  permissible,  and  if,  as 
Hon.  Mr.  Vreeland  predicts,  it  crowds  out  or  displaces 
the  local  banks  by  reason  of  its  more  economical  working, 
that  the  huge  aggregate  of  bank  balances  carried  by  the 
New  York  institutions  will  dwindle  until  it  reaches  much 
smaller  proportions.  As  these  balances  now  constitute 
what  might  be  termed  a  showing  of  fictitious  or  false 
banking  power  as  well  as  one  of  the  most  dangerous 
features  of  the  present  system,  there  should  be  general 
thankfulness  at  the  prospect  of  their  elimination  by 
purely  natural  means,  through  the  institution  of  a  kind 
of  banking  which  is  acknowledged  by  its  enemies  to  be 
economical  and  efficient. 

When  the  New  York  State  Legislature  compelled  the 
trust  companies  in  its  jurisdiction  to  convert  a  consider- 


A    RATIONAL    BANKING    SYSTEM 

able  part  of  their  bank  balances  into  cash  to  be  carried  in 
their  own  vaults  the  change  was  generally  recognized  as 
admirable  and  salutary.  This  other  change  would  be  of 
exactly  the  same  nature.  Instead  of  the  trust  companies 
it  would  be  the  interior  banks  that  converted  their  bal- 
ances in  banks  partly  into  specie  and  legals. 

How  THE  RESERVE  AGENTS  WOULD  FARE 

One  of  the  interesting  problems  connected  with  this 
supposititious  wiping  out  of  the  unwieldy  total  of  bank 
balances  is  this:  How  will  the  great  metropolitan  bank- 
ing institutions  adjust  themselves  to  the  change?  It 
means  ultimately  the  loss  of  vast  sums  which  they  now 
hold;  and  a  not  inconsiderable  part  of  the  withdrawals 
would  be  in  specie.  In  the  chapter  on  the  currency  ques- 
tion I  shall  indicate  one  source  whence  the  centres  might 
make  a  large  acquisition  of  cash  through  the  working  of 
the  new  system.  If  the  branch  banks  had  reasonably 
liberal  note-issuing  rights  it  would  come  about  that  a 
large  total  of  hard  cash  now  carried  as  till  money  in  the 
individual  banking  offices  would  be  released  and  sent  to 
the  centres.  This  item  by  itself  might  furnish  enough 
cash  for  the  branch  -  bank  reserves  in  New  York  City  ; 
and  if  that  were  the  case,  the  liquidation  of  the  bank 
balances  would  simply  mean  the  transfer  of  loans  from 
the  presently  existing  depository  banks  to  the  branches 
of  the  outside  institutions. 

Of  course  it  is  to  be  remembered  that  the  financial 
banks  of  New  York  would  themselves  be  acquiring  some 
independent  institutions  of  more  or  less  importance  to 
operate  as  branches.  Immediately  a  New  York  bank 
acquired  a  bank  in  the  interior  that  carried  a  balance 
with  it  the  balance  would  be  extinguished,  since  it  would 
be  owed  by  the  New  York  bank  to  its  branch,  in  other 
words,  to  itself.  In  this  way  a  considerable  extinguishing 
of  the  balances  might  be  expected.  If  the  banks  are  given 

164 


WALL    STREET    DOMINATION 

a  reasonable  degree  of  liberty,  along  with  reasonably  gen- 
erous note-issuing  rights,  and  the  legislatures  refrain  from 
meddling  overmuch,  there  is  every  likelihood  that  the 
problem  would  solve  itself.  The  movement  would  take 
place  along  the  lines  of  least  resistance,  and  it  may  be 
assumed  that  those  great  financiers  who  guide  the  des- 
tinies of  the  large  metropolitan  banks,  which  now  hold 
the  enormous  deposits  belonging  to  other  banks,  will 
devise  measures  calculated  to  protect  the  interests  of 
themselves  and  of  their  banks.  At  any  rate,  it  is  certain, 
if  their  public  utterances  are  to  be  believed,  that  some  of 
the  most  prominent  of  them  are  in  favor  of  branch  bank- 
ing; and  it  is  not  to  be  supposed  that,  in  their  considera- 
tion of  the  subject,  they  have  overlooked  this  feature  of 
the  conversion  of  the  balances  into  cash.  Therefore,  it 
may  be  presumed  that  they  are  confident  of  their  ability 
to  liquidate  the  balances  held  by  them,  when  the  occasion 
for  doing  so  presents  itself,  without  undue  inconvenience 
and  without  material  loss  of  earning  capacity. 

These  balances  of  other  banks  carried  in  New  York  , 
are  the  source  of  trouble  in  other  than  panicky  times.  / 
It  has  been  shown  that  in  the  panics  they  are  responsible 
to  a  large  extent  for  the  suspensions  of  payments.  In 
addition  every  autumn  they  are  more  or  less  a  source  of 
trouble.  The  withdrawal  of  balances,  in  the  form  of 
currency,  is  apt  to  upset  the  money  market  and  to  send 
interest  rates  to  high  levels.  The  commercial  and  in- 
dustrial interests  of  the  country  are  the  chief  sufferers 
from  this  circumstance.  The  skilled  financiers  at  the 
centres  know  how  to  protect  themselves;  frequently  they 
are  able  to  extract  profit  from  the  disturbances. 

IP  LARGER  CASH  RESERVES  WERE  CARRIED 

There  is  one  way  in  which  this  movement  of  currency 
to  and  from  New  York  might  take  place,  under  the 
system  of  small  local  banks,  without  causing  undue  dis- 

165 


A    RATIONAL    BANKING    SYSTEM 

turbance.  But  there  is  scarcely  any  prospect  that  it  will 
be  followed.  If  the  depository  banks  in  New  York  and 
other  reserve  centres  ceased  altogether  to  pay  interest 
on  these  balances,  and  if,  on  receiving  funds  from  in- 
terior banks  in  the  habit  of  withdrawing  currency  in  the 
fall,  they  held  50  or  60  per  cent,  of  the  deposits  as  cash 
in  vault,  instead  of  putting  all  but  25  per  cent,  out 
at  call,  they  would  be  able  to  meet  the  autumn  drain  of 
cash  to  the  interior  without  disturbing  the  financial  situa- 
tion. It  would,  however,  involve  keeping  fifty  or  sixty 
millions,  and  perhaps  more  than  that,  idle  for  several 
months  in  every  year.  One  reason  the  plan  is  imprac- 
ticable is  that  all  the  different  centres  could  hardly  be 
induced  to  cease  paying  interest.  If  New  York  allowed 
no  interest  and  other  centres  continued  to  allow  it  a 
large  part  of  the  funds  would  be  diverted  to  other  cit- 
ies which  do  not  possess  New  York's  ability  to  return 
them. 

CAUSE  OF  THE  MONEY-MARKET  DISTURBANCES 

I  admit  that  this  periodical  disturbance  of  the  money 
market  by  reason  of  the  currency  shipments  in  the  fall 
is  due  chiefly  to  the  rigidity  of  the  currency  system.  And 
it  is  contended  by  the  adherents  of  the  local  independent 
banks  that  if  they  are  given  the  right  to  issue  notes 
against  their  general  assets  they  can  provide  the  currency 
required  for  the  crop  moving  without  upsetting  the 
money  market.  I  concede  that  if  a  satisfactory  practical 
plan  of  conferring  upon  the  national  banks  this  privilege 
of  note  issue  can  be  worked  out,  it  would,  perhaps,  do 
away  with  the  customary  fall  stringency;  but  there  are 
certain  reasons  which  cause  me  to  think  that  the  exercise 
of  this  note-issuing  privilege  by  a  vast  number  of  small 
banks,  such  as  the  United  States  possesses,  would  be  at- 
tended by  results  somewhat  different  from  those  which 
follow  the  exercise  of  the  same  rights  by  large  branch 

166 


WALL    STREET    DOMINATION 

banks  in  other  countries.  And  it  is  quite  possible  that 
the  plan  might  not  fulfil  expectations  in  regard  to  re- 
lieving the  money  market  in  the  fall  season.  However, 
these  considerations  will  be  dealt  with  more  particularly 
in  the  chapter  on  the  currency. 

CHANGE  IN  NEW  YORK  BANKING  CONDITIONS 

It  has  been  suggested  that  there  might  be,  ultimately, 
in  the  financial  part  of  New  York  City,  some  two  hundred 
banking  offices,  the  branches,  or  principal  offices,  of  the 
two  hundred  large  banks  operating  in  the  United  States. 
On  reading  this  the  practical  banker  will  perhaps  be  dis- 
posed to  say:  "New  York  is  a  large  and  busy  city,  but  I 
do  not  see  how  any  profit  is  to  be  made  in  banking  if 
two  hundred  large  banks  are  huddled  together  in  the 
financial  district  competing  for  all  the  business  that 
offers."  The  explanation  is  that  many  of  the  outside 
banks  maintaining  branches  in  New  York  City  would  not 
seek  to  do  a  local  business.  They  would  confine  them- 
selves to  acting  as  correspondents  for  their  own  branches 
and  as  custodians  of  their  reserve  money  carried  in  New 
York.  There  would  be  a  respectable  number  of  the 
whole  which  would  not  even  perform  these  functions. 
They  would,  perhaps,  content  themselves  with  doing 
much  the  same  kind  of  business  in  New  York  as  the 
agencies  of  the  Canadian  banks  now  carry  on  there.  The 
Canadian  bank  agent  does  not  carry  specie  or  legals,  nor 
does  he  act  as  correspondent  for  his  own  bank.  His 
functions  consist  in  buying  and  selling  foreign  exchange,^, 
accepting  items  on  Canada  for  collection  or  discount, 
lending  the  bank's  moneys  at  call  and  on  time  against 
collateral,  and  buying  bonds  for  investment.  The  two 
functions  last  named  are  performed  strictly  under  in- 
structions from  the  head  office ;  and  the  dealings  in  foreign 
exchange  are  also  to  a  large  extent  subject  to  head-office 
instructions. 

167 


A    RATIONAL    BANKING    SYSTEM 

How  THE  MONEY  MARKET  WOULD  BE  AFFECTED 

Each  Canadian  bank  carries  funds  on  deposit  with  one 
or  more  of  the  large  banks  in  the  New  York  Clearing- 
House  Association,  and  at  all  its  branches  it  draws  upon 
these  balances.  Also  the  branches  send  the  New  York 
and  other  United  States  items  which  they  receive  in  the 
course  of  their  business  to  the  correspondent  bank  in 
New  York  and  not  to  the  bank's  agency.  The  New  York 
agents  have  the  custody  of  a  large  part  of  the  investment 
bonds,  of  the  collateral  security  against  the  call  and 
time  loans,  and  they  operate  a  share  of  the  London  ac- 
count of  the  bank.  If  agencies  of  this  description  were 
operated  by  some  of  the  United  States  branch  banks  they 
would  not  interfere  materially  with  the  local  New  York 
banking  business. 


X 

THE  CURRENCY   QUESTION 
THREE  REMEDIES 

THERE  is  no  need  at  this  late  day  of  assailing  the  ex- 
isting bond -secured  currency  system  of  the  United 
States.  It  has  few  defenders;  on  all  hands  its  faults  are 
recognized.  The  national  bank  note  issue  is  one  of  the 
things  marked  for  reform.  So,  in  this  chapter  it  is  taken 
for  granted  that  no  intelligent  and  unbiased  American 
wishes  to  retain  the  present  system;  and  that  all  are 
willing  to  see  a  change  as  soon  as  the  question  as  to  the 
best  reform  to  adopt  is  properly  settled. 

I  have  in  mind  three  ways  in  which  the  desired  quality 
of  elasticity  might  be  imparted  to  the  bank  note  currency : 
The  national  banks  as  at  present  constituted  might  be  I 
permitted  to  issue  notes  against  their  general  assets,  to 
issue  asset  currency  as  it  is  popularly  called ;  second,  a  ^ 
great  central  bank  might  be  created  and  to  it  a  monopoly 
of  the  privilege  of  note  issue  might  be  given;  and,  third, 
the  existing  banks,  national  and  state,  might  be  per- 
mitted and  encouraged  to  develop  into  branch  banks,  and 
the  right  to  issue  notes  on  the  security  of  their  general 
assets  might  be  given  to  all  possessing  a  certain  minimum 
of  paid-up  capital  not  in  any  case  to  be  less  than  $3,000,- 
ooo.  It  will  be  profitable  to  discuss  the  practical  working 
of  these  several  plans. 

THE  NATIONAL  BANKS  AND  ASSET  CURRENCY 
It  is  very  much  open  to  question  whether  it  is  possible 
to    solve   the    currency   question   satisfactorily   through 

169 


A    RATIONAL    BANKING    SYSTEM 

giving  all  national  banks  in  the  United  States,  as  they 
at  present  are,  the  right  to  issue  notes  against  their  gen- 
eral assets.  As  soon  as  that  plan  is  broached  there 
rises  up  the  question  as  to  how  the  note-holder  shall  be 
secured.  "By  a  redemption  fund  and  a  mutual  guar- 
anty," I  hear  some  one  say.  "Yes,  but  what  is  to  be 
behind  the  fund  and  guaranty?  Remember,  the  strong 
Canadian  banks  consent  to  guarantee  the  notes  of  all 
chartered  banks  in  Canada,  the  weak  as  well  as  the 
strong,  because  the  several  note  issues  are  strictly  limited 
as  to  amount,  because  the  notes  are  an  absolute  first  lien 
on  the  assets  of  the  banks  issuing  them,  and  because  the 
Canadian  Bankers'  Association  possesses  and  exercises 
the  right  to  examine  the  circulation  records  of  all  the 
banks.  Without  the  prior  lien,  and  without  other 
special  security,  it  is  altogether  likely  that  some  of  the 
strongest  banks  would  relinquish  the  right  of  issue  rather 
than  join  in  a  general  guaranty  of  all  notes  issued." 

How  THE  BANK  NOTES  SHOULD  BE  SECURED 

There  seems  to  be  a  strong  feeling  in  the  United  States 
against  conferring  upon  the  note  issues  of  the  national 
banks,  in  the  event  of  asset  currency  being  inaugurated, 
a  priority  over  the  other  evidences  of  debt  issued  by  the 
banks.  It  is  thought  that  if  it  were  done  the  position 
of  the  depositors  would  be  weakened.  Judging  from  the 
tenor  of  schemes  previously  proposed  it  seems  likely  that 
the  note  emissions  of  national  banks  would  be  guaranteed 
or  protected  by  means  of  an  annual  tax  laid  upon  the 
general  issue.  Thus  each  bank  would  pay  to  Govern- 
ment an  annual  tax  of  a  fraction  of  i  per  cent,  upon  its 
circulation,  the  proceeds  of  the  tax  forming  the  redemp- 
\tion  or  guaranty  fund  to  care  for  the  issues  of  insolvent 
"*  banks.  Then  the  notes  would  rank  equally  with  the 
deposits  and  would  share  equally  with  them  in  dividends 
paid  to  creditors. 

170 


THE    CURRENCY    QUESTION 

Of  course,  in  principle,  an  arrangement  of  this  kind  is 
identical  with  the  vicious  schemes  of  mutual  guaranty  of 
deposits  which  have  been  so  generally  and  so  justly  con- 
demned. Honest  and  able  bankers  are  levied  upon  to 
pay  the  losses  incurred  through  the  operations  of  the 
dishonest  and  incapable.  But  as  the  payments  and 
liability  of  each  bank  would  be  limited  to  perhaps  J  per 
cent,  per  year  on  its  outstanding  note  circulation,  many 
bankers  would  not  object  to  the  scheme. 

THE  NOTE  ISSUES  MUST  YIELD  A  PROFIT 

If  a  currency  scheme  such  as  this  is  to  be  successful 
it  is  essential  that  the  bankers  find  a  profit  in  issuing 
notes.  For  if  note  issue  involved  a  loss  they  would  not 
create  currency,  no  matter  how  much  the  country  needed 
it.  We  have  seen  that  the  hypothetical  Bank  of  Minne- 
sota made  a  profit  of  about  2.47  per  cent,  on  its  note 
issues.  This  can,  perhaps,  be  taken  as  about  the  rate 
of  profit  made  by  the  Canadian  banks  on  their  ordinary 
note  issues.  Deduct  £  per  cent,  from  that  and  2.22  per 
cent,  is  left. 

THE  NECESSITY  OP  REDEMPTION  FACILITIES 

Though  the  Canadian  banks  may  count  upon  a  profit 
of  over  2  per  cent,  on  their  note  issues,  and  though  the 
hypothetical  Bank  of  Minnesota,  after  paying  the  tax  of 
J  per  cent.,  could  still,  perhaps,  show  a  profit  of  2.22  per 
cent.,  it  is  altogether  likely  that  note  issues  by  non- 
branch  banks  could  not  show  a  profit  equal  to  either  of 
these  if  adequate  provision  is  made  for  the  prompt  re- 
tirement and  redemption  of  currency  not  needed  by  the 
country's  trade  and  commerce.  If  the  note  issues  are 
to  do  their  work  properly,  and  without  damaging  or  en- 
dangering the  general  financial  and  business  situation, 
adequate  provision  of  this  kind  must  be  made.  If  that 
12  J7i 


A    RATIONAL    BANKING    SYSTEM 

is  not  done,  if  any  bank  may  put  its  entire  authorized 
issue  into  circulation  without  having  to  make  daily  re- 
demption of  such  notes  as  are  not  needed,  grave  dangers 
would  threaten  the  country.  Gold  might  be  driven  out 
and  the  conditions  would  be  favorable  to  inflation  of 
prices.  The  object  of  any  change  which  is  made  in  the 
currency  system  would  be  to  introduce  elasticity.  What 
is  wanted  is  a  system  that  will  automatically  create  ad- 
ditional currency  when  the  country  has  special  need  for 
it,  and  then  automatically  retire  the  extra  portion  when 
the  special  need  for  it  expires  or  passes  away.  Unless 
the  new  style  of  currency  possessed  this  quality  of  elas- 
ticity there  would  be  scarcely  any  reason  for  making  a 
change.  To  get  elasticity,  facilities  for  redemption  must 
be  provided  as  well  as  facilities  for  issuing.  Now  let  us 
see  what  practical  arrangements  for  redemption  are 
possible. 

AN  EXACT  MEASURE  OF  THE  PUBLIC  REQUIREMENTS 

Before  discussing  them  I  shall  explain  how  it  is  that 
the  Canadian  bank  note  issues  possess  their  quality  of 
flexibility,  how  the  outstanding  bank  note  circulation 
cannot  do  other  than  measure  exactly  the  Dominion's 
need  for  circulating  medium.  It  is  to  be  borne  in  mind, 
first  of  all,  that  the  notes  of  the  chartered  banks  con- 
stitute practically  the  whole  currency  used  by  the  people 
in  day-to-day  transactions — excepting  the  subsidiary 
coinage,  silver  and  copper,  and  the  Dominion  Government 
"ones"  and  "twos"  which  are  used  for  small  change. 

WHY  REDEMPTION  Is  THOROUGH  IN  CANADA 

It  is  an  easy  matter  to  explain  why  each  bank  in 
Canada  uses  every  means  in  its  power  to  get  its  own  notes 
into  circulation.  Each  bank  is  interested  in  inducing  its 
customers  and  friends  to  use  its  notes  in  making  their 

172 


THE    CURRENCY    QUESTION 

payments.  Each  one  strives  to  get  as  much  of  its  au- 
thorized issue  as  possible  into  circulation.  If  a  customer, 
in  transacting  business  at  his  bank,  shows  a  parcel  of 
notes  of  other  banks,  of  Dominion  notes,  or  of  United 
States  currency,  he  will  most  likely  be  asked  to  exchange 
them  for  his  own  bank's  notes.  Of  course  in  all  its  pay- 
ments the  bank  pays  out  its  own  notes  exclusively  while 
it  has  an  unused  margin  of  authorized  issue,  except  for 
the  small  change,  of  denominations  less  than  five  dollars. 
It  is  eagerly  collecting  the  notes  of  its  competitors  and  of 
other  obligants,  withdrawing  them  from  circulation  in  the 
hope  that  a  vacancy  will  thereby  be  created  into  which  it 
may  put  its  own  notes.  This  policy  is  vigorously  pur- 
sued all  through  the  year  except  during  the  period,  if  any, 
in  which  the  bank's  own  circulation  is  up  to  the  authorized 
limits.  When  that  happens  the  bank  has  nothing  to  gain 
through  withdrawing  the  notes  of  its  competitors  from 
circulation,  and  it  becomes  indifferent  about  the  matter. 
There  is  considerable  expense  involved  in  collecting  and 
forwarding  for  redemption  the  notes  of  other  banks. 

THE  PROVINCIAL  REDEMPTION  AGENCIES 

According  to  the  Canadian  banking  law  each  chartered 
bank  is  required  to  provide  and  maintain  a  redemption 
agency  in  every  important  province.  This  agency  in  the 
case  of  each  province  is  to  be  at  the  recognized  financial 
centre.  Take  the  case  of  a  bank  branch  operating  in  a 
small  Manitoba  town  without  opposition.  In  the  towns 
round  about  will  be  branches  of  competing  banks,  and 
their  notes,  as  well  as  the  notes  of  Winnipeg  banks  sent 
out  by  the  large  grain  firms,  will  be  circulating  freely 
through  the  whole  district.  Every  day  over  the  counter 
at  the  branch  in  question  will  come  a  goodly  amount  of 
these  notes  of  other  banks,  or  "sundries,"  as  they  are 
called.  The  branch  ships  them  all  to  its  Winnipeg  branch 
as  they  accumulate  into  $1,000  parcels,  which  in  the  busy 


A    RATIONAL    BANKING    SYSTEM 

season  will  be  nearly  every  day.  They  are  sent  by  ex- 
press or  by  registered  mail  insured.  Take  a  different 
town  in  the  same  province  where  the  branch  has  opposed 
to  it  a  branch  of  another  bank.  Here  there  will  be  a  daily 
exchange  between  the  two  branch  banks  of  each  other's 
notes  along  with  the  daily  exchange  of  checks,  etc.  So 
neither  has  to  pay  any  transportation  charges  on  the 
notes  of  its  competitor  which  are  received  over  the 
counter.  But  all  others  must  be  shipped  to  the  centre. 
If  there  are  three  banks  represented  there  will  be  an 
exchange  of  notes  among  the  three.  In  the  centres  no 
transportation  charges  are  to  be  paid  on  the  receipts  of 
bank  note  currency,  since  every  note  of  the  Canadian  banks 
has  a  branch  or  redemption  agent  to  redeem  it. 

WHEN  THE  NOTE  CIRCULATION  Is  NEAR  THE  LIMIT 

In  connection  with  the  circulation  of  its  notes  at  all 
branches  other  than  the  centres,  each  bank  is  constantly 
shipping  out  sundries  and  shipping  in  its  own  notes. 
The  expense  thus  involved,  and  the  other  expenses  at- 
tendant upon  the  circulation  of  the  notes,  are  borne  or 
accepted  because  the  note  issues  yield  a  satisfactory 
profit  over  and  above  the  expenses.  All  banking  readers 
will  doubtless  see  from  the  foregoing  that  there  cannot 
be  in  circulation  at  any  time  a  volume  of  currency  greater 
than  the  business  of  the  country  calls  for.  The  desire  of 
each  bank  to  push  its  own  circulation  causes  it  to  with- 
draw from  circulation  as  many  of  its  competitors'  notes 
as  it  can.  As  soon  as  it  gets  possession  of  other  banks' 
notes  it  hurries  them  forward  for  redemption.  This  proc- 
ess of  redemption  goes  actively  on  all  through  the  year 
except  during  the  two  or  three  months  in  the  height  of 
the  grain  season,  when  the  issues  of  most  of  the  banks 
are  close  to  the  ordinary  limits.  Prior  to  the  going  into 
effect,  in  1908,  of  the  amendment  to  the  Bank  Act  which 
authorized  the  banks  to  issue  excess  currency  between 

174 


THE    CURRENCY    QUESTION 

September  aoth  and  the  end  of  the  following  January 
there  was  a  period  each  year  during  which  most  of  the 
banks  in  Canada  paid  out  over  the  counter  sundries  as 
well  as  their  own  notes,  in  the  same  manner  as  is  done 
by  the  banks  in  the  United  States.  But  as  soon  as  the 
need  for  currency  in  the  wheat  fields  became  less  urgent 
each  bank  would  find  that  its  customers  and  the  cus- 
tomers of  other  banks  were  depositing  and  paying  in 
more  currency  than  they  were  drawing  out.  As  each 
branch  must  report  regularly  to  the  head  office  the  amount 
of  the  bank's  own  notes  on  hand,  the  effect  of  this  move- 
ment is  quickly  seen  by  the  executive.  When  it  becomes 
clear  that  the  tide  has  turned,  all  branches  are  again  in- 
structed to  push  the  circulation  vigorously,  so  as  to  get 
all  possible  profit  from  the  note  issue. 

THE  BRANCHES  FACILITATE  ISSUE  AND  REDEMPTION 

Since  the  1908  amendment  was  passed  some  of  the  banks 
have  used  the  right  it  gives  them  to  issue  excess  circula- 
tion in  the  grain  season.  But  it  is  complained  that  the 
tax  of  5  per  cent,  levied  by  the  Government  creates  con- 
ditions under  which  the  excess  currency  can  only  be  is- 
sued at  a  loss  by  banks  which  are  in  strong  position. 
Probably  it  will  be  necessary  to  reduce  the  tax  to  induce 
the  bank  to  have  recourse  to  the  right  as  generally  as 
could  be  wished. 

It  will  doubtless  have  occurred  to  the  most  thoughtful 
of  my  readers,  in  connection  with  this  matter  of  the  cir- 
culation and  redemption  of  the  notes,  that  both  are 
facilitated  and  made  less  expensive  because  of  the  exist- 
ence of  comprehensive  systems  of  branches.  The  follow- 
ing is  an  extreme  case  illustrating  how  the  existence  of 
the  branches  conduces  to  the  profit  on  the  note  issues. 
The  Bank  of  Montreal  branch  in  Halifax,  Nova  Scotia, 
may  pay  out  $1,000  of  its  own  notes  to  a  customer  who 
sends  them  or  carries  them  to  British  Columbia,  where 

175 


A    RATIONAL    BANKING    SYSTEM 

they  are  put  into  circulation.  Eventually  they  are  re- 
deemed by  the  Vancouver  branch  of  the  bank,  which 
pays  cash  or  gives  credit  for  them  and  uses  them  for  its 
counter  payments.  It  may  very  likely  develop  that 
through  receiving  and  redeeming  these  notes  the  Van- 
couver branch  is  saved  the  expense  of  bringing  $1,000 
of  its  own  notes  from  Winnipeg  or  Montreal  for  counter 
purposes.  It  is  the  same  at  all  branches.  Each  one  ap- 
plies all  of  the  bank's  own  notes  redeemed  by  it  to  use 
for  counter  payments,  and  requires  to  bring  in  that  much 
less  from  the  depot  branches.  A  considerable  number  of 
branches  are  not  obliged  to  import  any  notes,  because 
the  circulating  medium  in  their  districts  is  so  strongly 
impregnated  with  the  bank's  notes  that  they  get  enough 
of  them  in  their  daily  receipts  to  supply  their  needs. 

NOTE  ISSUES  OF  ISOLATED  BANKS 

Let  us  now  investigate  the  practical  working  of  the  cir- 
culation and  redemption  of  the  asset  currency  which  would 
be  emitted  by  the  isolated  banks  of  the  United  States. 
I  shall  presume  that  the  terms  and  conditions  of  issue 
are  favorable  enough  to  induce  each  bank  to  strive  earn- 
estly to  keep  its  own  notes  in  circulation  up  to  the  au- 
thorized limit.  No  matter  where  one  of  these  banks  of 
issue  was  situated  there  would  be  opportunities  present- 
ing themselves  continually  for  the  circulation  of  its  notes 
in  far-away  places.  Its  customers  and  payees  would  be 
continually  drawing  cash  from  it  and  sending  the  money 
by  express  or  through  the  mails,  or  carrying  it  with  them 
on  their  travels  to  other  parts  of  the  United  States.  By 
taking  advantage  of  these  opportunities  it  ought  to  be 
comparatively  easy  for  small  banks  with  authorized 
issues  of  $50,000  or  $100,000  to  keep  the  whole  amount 
outstanding  all  the  time.  At  each  place  the  body  of 
the  circulation  would  be  obtained  through  the  payments 
over  the  counter  for  carrying  on  the  business  of  the  town 

176 


THE    CURRENCY    QUESTION 

or  village.  A  large  proportion  of  the  notes  so  paid  out 
would  come  back  next  day,  or  in  two  days;  more  would 
come  in  three  days  or  four  days.  But,  as  fresh  emissions 
of  notes  are  taking  place  all  the  time,  a  good  part  of  the 
authorized  issue  would  be  in  play.  The  remainder  might 
easily  be  put  out  through  the  payments  or  shipments  to 
far-away  points.  And  it  might  develop,  when  crop- 
moving  came  round,  that  many  of  the  banks  had  no  mar- 
gin of  authorized  issue  to  use.  This  would  be  likely,  for 
one  reason,  because  of  the  expense  and  trouble  involved 
in  redemption. 

THE  LABOR  OP  SORTING  AND  RETURNING 

Go  back  once  more  to  the  Canadian  practice.  In  with- 
drawing the  notes  of  competitor  banks  from  circulation 
and  forwarding  them  for  redemption  there  is  involved  the 
sorting  of  the  notes.  At  present  there  are  twenty-nine* 
going  banks  in  Canada.  In  any  district  outside  the  cities 
there  would  probably  be  a  dozen  or  fifteen  banks  the 
notes  of  which  would  figure  largely  in  the  circulating 
medium.  As  they  come  in  over  the  counter  the  receipts 
of  notes  are  to  be  sorted — each  bank's  issue  is  to  be  put 
together  by  itself.  So  there  would  be,  in  the  sort,  a  dozen 
or  fifteen  piles  of  some  importance,  and  scattered  notes 
of,  perhaps,  a  dozen  other  banks  which  had  no  circulation 
of  consequence  in  that  particular  district.  Even  in  the 
largest  cities  the  sort  calls  for  only  twenty-two  or  twenty- 
three  piles. 

But  there  would  be  a  vast  difference  in  this  respect  in 
the  United  States.  Instead  of  twenty-nine  issuing  banks 
there  would  be  six  or  seven  thousand.  A  parcel  of  $1,000 
in  fives  made  up  from  the  counter  receipts  anywhere  in 
the  Union  would,  perhaps,  consist  of  one,  or  two,  or  more 
notes  of  one  hundred  and  fifty  separate  banks.  In  a 

*  The  number  has  since  been  reduced  to  twenty-six. 
177 


A    RATIONAL    BANKING    SYSTEM 

parcel  of  $10,000  might  be  found  the  issues  of  eight  hun- 
dred or  nine  hundred  banks.  If  redemption  is  to  be 
prompt  and  thorough  these  receipts  of  notes  must  be 
sorted  daily  at  all  banking  points  of  any  importance. 
The  obligations  of  each  bank  must  be  placed  by  them- 
selves and  returned  to  the  issuers.  Consider  the  enormous 
trouble  and  expense  connected  with  this  operation.  No 
branches  are  at  hand  conveniently  located  for  redeeming 
the  issues  of  other  branches  and  anxious  to  use  the  notes 
for  their  own  purposes.  Each  note  must  go  back  to  the 
identical  office  that  issued  it,  even  if  it  is  the  emission  of 
a  Maine  bank  that  turns  up  in  San  Francisco.  I  do  not 
see  how  this  difficulty  is  to  be  escaped  if  redemption  is  to 
be  effective  and  prompt.  Some  persons  might  argue  that 
arrangements  can  be  made  whereby  the  banks  may  pay 
these  sundries  or  other  banks'  notes  in  bulk,  without 
sorting  them,  into  a  branch  of  the  United  States  Treasury 
or  to  a  general  redemption  agency.  But  that  would  be 
merely  shifting  the  work  to  other  shoulders.  The  sorting 
and  shipping  must  be  done  in  any  case,  and  the  expense 
and  trouble  would  still  remain. 

IF  REDEMPTION  WAS  NOT  THOROUGH 

These  considerations  as  to  what  would  arise  in  actual 
practice  make  it  appear  that  there  would  not  be  prompt 
or  thorough  redemption  of  asset  currency  issued  by  single- 
office  banks,  as  the  individual  banks  would  not  take  the 
trouble  or  do  the  work  necessary  to  effect  it.  In  those 
cases  where  the  receiving  bank  was  able  easily  to  keep 
its  own  authorized  issue  outstanding  there  would  be  no 
incentive.  Perhaps  the  country  banks  would  ship  their 
surplus  currency  to  the  centres  without  sorting  it  and  the 
work  would  have  to  be  done  there  by  the  reserve  agents. 
This  practice  might  lead  to  a  rearrangement  of  the  terms 
on  which  the  reserve  agents  received  shipments  of  cur- 
rency from  country  correspondents. 


THE    CURRENCY    QUESTION 

So  in  view  of  this  serious  difficulty  it  might  happen 
that  redemption  would  not  be  effective,  and  that  the 
asset  notes  issued  by  the  thousands  of  small  banks  might 
remain  at  or  near  the  maximum  authorized  amount 
through  the  year.  If  this  were  so  when  crop  moving  time 
arrived  there  would  be  no  reserve  supply  of  asset  currency 
available,  and  the  old  expedient  of  drawing  hard  cash 
from  the  centres  might,  perhaps,  be  necessary.  Perhaps, 
also,  there  would  be  less  hard  cash  in  the  centres  to  draw 
upon,  for  the  bank  notes  would  have  a  tendency  to  dis- 
place other  forms  of  currency  and  much  gold  would 
probably  have  been  driven  to  Europe. 

NOTE  ISSUES  A  POSSIBLE  SOURCE  OF  DANGER 

Several  other  objections  to  the  conferring  of  rights  of 
uncovered  note  issue  upon  a  system  of  small  isolated 
banks  occur  to  the  mind,  but  space  does  not  permit  of  an 
extended  discussion  of  them.  There  is  a  probability  that 
many  of  the  less  experienced  bankers  would  find  in  their 
issue  power  a  means  of  making  unwise  or  bad  loans. 
Then  the  bankers  might  be  led  to  think,  because  they 
were  able  to  keep  their  outstanding  issues  up  to  the 
authorized  limits  in  ordinary  or  normal  times,  that  there 
was  no  necessity  for  being  always  prepared  to  redeem 
them;  and  when  a  severe  crisis  appeared,  that  had  the 
effect  of  driving  the  outstanding  notes  remorselessly 
home  for  redemption,  the  chances  are  that  the  note 
issues  would  be  the  cause  of  numerous  bank  failures. 

These  arguments  are  based  on  the  assumption  that  the 
national  banks  would  find  it  profitable  to  push  their 
issues  to  the  limits.  It  is  quite  possible,  if  the  right  of 
issue  against  their  general  assets  is  conferred  on  the 
national  banks,  that  the  tax  and  the  peculiar  expenses 
connected  with  the  issue  and  redemption  would  deter  the 
better  class  of  banks  from  using  their  powers,  because 
there  was  no  profit,  or  a  profit  so  small  as  not  to  be  at- 

179 


A    RATIONAL    BANKING    SYSTEM 

tractive,  connected  with  the  business  of  note  issue.  In 
that  event  the  right  of  issue  would  be  degraded  into  a 
means  of  raising  funds  by  banks  in  uncomfortable  circum- 
stances. And  the  scheme  would  hardly  be  of  much  value 
for  providing  a  good  currency. 

THE  CENTRAL  BANK'S  MONOPOLY  OF  ISSUE 

It  is  time,  however,  to  consider  the  second  alternative 
— that  of  creating  a  great  central  bank  and  endowing  it 
with  a  monopoly  of  the  privilege  of  note  issue.  Such  an 
institution,  if  it  is  to  supply  notes  to  replace  the  national 
bank  note  issues,  would  require  to  have  very  large  powers 
of  issue;  and,  to  maintain  the  credit  and  convertibility 
of  its  notes,  it  would  require  to  carry  a  very  strong  re- 
serve. Presumably  it  would  deliver  its  paper  to  other 
banks  as  proceeds  of  loans  made  to  them  or  as  payments 
for  deposits  withdrawn  by  them.  Thus,  when  the  au- 
tumnal currency  drain  set  in  there  would  be  seen  a  proc- 
ess something  like  the  following:  The  country  banks 
would  forward  instructions  to  New  York,  Chicago,  etc., 
for  the  return  of  their  balances  in  the  form  of  currency. 
Either  the  country  banks  themselves  or  their  corre- 
spondents at  the  centres  would  carry  balances  with  the 
central  institution,  and  when  the  balances  were  with- 
drawn the  central  bank  would  simply  expand  its  issues. 
By  merely  paying  out  its  own  notes  and  sending  them 
to  the  country,  the  withdrawals  of  interior  balances 
might  be  met,  through  creating  an  additional  supply  of 
currency  for  the  special  need  of  harvest  time.  If  the 
New  York  banking  institutions  which  carried  heavy 
balances  belonging  to  the  interior  bankers,  on  being 
called  upon  to  ship  those  balances  in  the  form  of  cash, 
preferred  to  borrow  at  the  central  bank  rather  than  to 
liquidate  loans  made  by  them  to  their  customers  or  clients, 
they  might  do  so;  and  if  certain  of  the  interior  banks 
wished  to  borrow  from  the  central  bank,  and  could 

i  So 


THE    CURRENCY    QUESTION 

furnish  collateral  of  the  required  character,  they  could 
do  so. 


EXPANSION  OF  ISSUES  DURING  THE  HARVEST  SEASON 

It  would  be  reasonable  enough  to  expect  that  the  move- 
ment of  the  crops  would  cause  an  expansion  of  the  note 
issues  of  the  central  bank  to  the  extent  of  $100,000,000 
or  more,  thus  effecting  an  economy  in  the  use  of  actual 
hard  cash.  There  need  not  be  inflation  either,  since 
when  the  interior  banks  found  that  the  bank  notes  which 
they  had  circulated  in  their  district  were  returning  in 
volume  they  would  forward  them  to  New  York  or  an- 
other centre  to  be  presented  to  the  central  institution 
for  redemption.  It  would  receive  them  partly  as  pay- 
ment for  loans  granted  by  it,  partly  as  deposits  by  other 
banks;  and  it  would  be  obliged  to  redeem  a  certain  pro- 
portion in  specie.  By  January  probably  the  whole 
amount  of  the  extra  issues  would  be  cleared  away  and 
the  first  important  stage  of  the  crop-moving  would  have 
been  handled  without  causing  disturbances  in  the  money 
markets,  or  depriving  the  borrowing  classes  in  the  great 
cities  of  the  accommodation  they  had  been  enjoying. 

AIDING  SMALL  BANKS  AND  REGULATING  THE  EXCHANGES 

In  another  way  the  central  bank  might  be  expected  to 
prove  exceedingly  useful.  During  a  panic,  while  the 
system  of  isolated  small  banks  endures,  it  might  prove 
a  strong  bulwark.  Institutions  in  distress,  that  possessed 
acceptable  securities  available  for  use  as  collateral,  might 
receive  assistance  from  it.  If  the  central  bank  itself 
maintained  a  high  credit,  as  it  likely  would,  its  notes 
would  provide  the  means  of  making  payments  to  de- 
positors; and  a  large  amount  of  currency  could  con- 
veniently be  sent  to  various  parts  of  the  United  States 
through  an  expansion  of  the  bank's  note  issues.  Then, 

181 


A    RATIONAL    BANKING    SYSTEM 

the  central  bank  would  provide  a  satisfactory  medium 
whereby  the  Bank  of  France  or  the  Bank  of  England 
might  extend  assistance  to  America.  It  was  remarked, 
during  the  last  panic,  that  the  Bank  of  France  was  pre- 
vented from  coming  to  the  aid  of  New  York  by  the  non- 
existence  of  a  medium  of  this  kind. 

Finally,  it  is  well  known  that  in  Europe  the  great  cen- 
tral banks  perform  a  very  useful  work  in  regulating  the 
exchanges  and  in  checking  excessive  outbursts  of  specu- 
lation. And  those  parties  who  advocate  the  formation 
of  a  great  centralized  institution  in  the  United  States 
consider  that  it  might  do  extremely  good  work  along 
those  lines.  It  would  also,  of  course,  carry  the  balances 
of  the  Government  and  relieve  the  United  States  Treasury 
of  its  banking  functions. 

SOME  OBJECTIONS  TO  A  CENTRAL  BANK 

These  prospective  benefits  are,  in  truth,  very  substan- 
tial, and  I  have  no  intention  of  trying  to  minimize  them. 
Holding  them  in  mind,  it  is  now  proper  to  take  account 
of  some  of  the  important  objections  to  the  creation  of 
such  a  bank.  In  the  first  place  it  might  be  argued  that 
to  create  a  central  bank  would  be  to  add  a  fresh  compli- 
cation to  a  banking  system  already  too  much  com- 
plicated. Nobody  quite  knows  how  such  an  institution 
would  work  in  America  or  what  effects  it  would  produce. 
It  is  certain  that  it  would  be  an  institution  of  great  power, 
and  that  there  would  be  much  patronage  connected  with 
it.  Whether  it  could  be  kept  out  of  politics  is  not  clear. 

If  it  performed  any  banking  functions  of  consequence 
it  could  hardly  avoid  encroaching  in  some  way  upon  the 
business  and  profits  of  the  ordinary  banks;  and  it  might 
quite  easily  become  the  centre  of  much  unsettling  strife. 
Then,  in  regard  to  its  notes,  it  is  to  be  remembered  that 
the  ordinary  banks  would  have  no  object  or  profit  in  cir- 
culating them.  To  the  other  banks  these  notes  would 

182 


THE    CURRENCY    QUESTION 

be  much  the  same  as  the  treasury  notes  of  to-day,  and 
like  the  Bank  of  England  notes  are  to  the  joint-stock 
banks  of  England — hard  cash,  to  be  obtained  only  through 
parting  with  an  equal  amount  of  cash  assets  or  by  means 
of  direct  borrowing. 

SMALL  PLACES  WOULD  NOT  OBTAIN  FACILITIES 

All  these  matters  occur  to  the  mind  when  the  question 
of  a  central  bank  is  under  consideration.  In  my  opinion 
there  is  another  formidable  objection.  Believing  as  I  do 
that  the  United  States  will  find  it  necessary  to  discard 
the  present  system  of  local  single-office  banks,  just  as 
France  and  England  found  it  necessary  to  discard  it,  and 
that,  in  the  next  generation  or  two,  in  spite  of  the  present 
hostility  of  the  legislatures  and  of  most  of  the  interior 
bankers,  branch  banks  will  make  their  way  into  the  mone-  ^  •*' 
tary  system  of  the  country  because  of  their  greater  useful- 
ness and  strength  and  their  more  economical  operation, 
I  consider  in  the  event  of  that  development  that  the  cen- 
tral bank  with  its  special  privileges  would  then  prove  to 
be  a  great  stumbling  block  in  the  way  of  the  ordinary 
banks,  just  as  the  Bank  of  England  with  its  special 
privileges  was  a  great  stumbling  block  to  the  ordinary 
joint-stock  banks  of  that  country.  To  get  its  note  issues 
into  general  circulation  the  central  bank  would  require  to 
have  either  a  monopoly  of  issue  or  some  other  decided  ad- 
vantage over  the  ordinary  banks.  If  the  central  institu- 
tion and  the  national  banks  were  on  an  equality  as 
regards  privileges  of  issue  the  national  banks  would  cir- 
culate their  own  notes  in  preference  to  those  of  the  cen- 
tral bank.  So  without  the  monopoly  of  note  issue  and 
without  special  privileges  the  central  bank  could  not  get 
its  notes  into  circulation  and  its  usefulness  as  a  provider 
of  currency  would  be  practically  nil.  And  a  central  bank 
with  a  monopoly  of  issue  would  be  an  effective  bar  to  the 
establishment  by  the  other  banks  of  branches  in  very 

183 


A    RATIONAL    BANKING    SYSTEM 

small  places,  and  would  thus  have  a  tendency  to  prevent 
the  development  of  the  banking  business  along  lines  cal- 
culated to  benefit  the  humblest  classes  and  the  smallest 
localities. 

ISSUE  RIGHTS  PROMOTE  BRANCH  EXTENSION 

It  is  well  known  that  in  Scotland  the  privilege  of  note 
issue  as  possessed  by  the  commercial  banks  enables  them 
to  provide  excellent  banking  facilities  for  the  rural  dis- 
tricts and  the  smallest  villages.  It  is  the  same  in  Canada. 
If  the  chartered  banks  of  the  Dominion  had  not  the  right 
to  issue  notes  against  their  general  assets  they  would  not 
be  found  in  every  little  hamlet  as  they  are  to-day.  On  the 
contrary,  the  branches  of  the  great  banks  would  be  found 
only  in  the  larger  villages  and  in  the  towns  and  cities. 
They  would  be  established  only  where  there  was  a  suf- 
ficiency of  profitable  business  to  be  had.  If  a  law  were 
passed  providing  that  on  a  certain  date  the  issue  rights  of 
the  chartered  banks  were  to  lapse,  the  arrival  of  that  date 
would  turn,  perhaps,  one-fifth  or  one-quarter  of  the 
branches  from  profitable  offices  into  unprofitable  offices, 
and  they  would  presumably  be  closed  as  soon  as  possible. 
One  may  imagine  what  a  wail  of  distress  would  go  up 
from  the  farmers,  retailers,  and  other  country  people 
at  the  withdrawal  of  these  facilities. 

How  THE  NOTE  ISSUE  AFFECTS  BRANCH  PROFITS 

Let  us  examine  the  position  of  an  individual  branch 
and  note  how  it  is  that  the  cancellation  of  the  right  of 
issue  would  turn  a  small  branch  that  had  been  profitable 
into  an  unprofitable  office.  Suppose  that  at  the  hypo- 
thetical branch  in  question  the  deposits  are  $130,000,  the 
loans  and  discounts  $100,000.  Of  the  deposits  $40,000 
are  free,  and  $90,000  are  subject  to  interest  at  3  per  cent. 
The  average  rate  on  the  discounts  is  6  per  cent.  The  in- 

184 


THE    CURRENCY    QUESTION 

come  from  such  a  branch  might  be:  Interest  on  loans, 
$100,000  at  6  per  cent.  =$6,000;  exchange,  commissions, 
etc.,  $1,200;  gross  profits,  $7,200.  The  outgo:  Interest 
on  deposits,  $90,000  at  3  per  cent.  =  $2,700 ;  salaries,  rents, 
taxes,  and  other  expenses,  $5,000;  total  outgo,  $7,700. 
The  net  deficit  to  be  charged  to  head  office  is  $500. 

Now  the  branch  must  carry  an  average  of  $3,000 
with  the  bank's  New  York  correspondent  for  drawing 
purposes,  $1,000  in  silver  coins,  and  $4,000  in  small  notes 
of  $i  and  $2  denominations  (I  am  assuming  that  the  right 
to  issue  is  confined  to  notes  of  $5  denomination  and 
multiples  thereof).  That  makes  $8,000  cash  funds  car- 
ried. As  the  deposits  exceed  the  loans  by  $30,000  the 
branch  draws  that  much  of  a  surplus  from  the  locality.  And 
as  it  is  using  only  $8,000  of  this  surplus  for  its  own  pur- 
poses a  balance  of  $22,000  has  been  put  at  the  disposal 
of  the  head  office.  Finally,  owing  to  the  payments  of  the 
bank's  own  notes  at  this  branch,  the  note  circulation  of 
the  whole  bank  is  greater  by  an  average  of  $50,000 
through  the  entire  year.  Allowing  for  a  cash  reserve  of 
$15,000,  or  30  per  cent.,  against  the  branch's  circulation, 
the  parent  bank  gains  the  use  of  a  further  sum  of  $35,000. 
Thus  the  bank  obtains  the  use  of  $57,000  from  this  par- 
ticular branch  at  a  cost  oi  $500  per  year,  or  less  than  i  per 
cent.  (.87  per  cent,  to  be  exact).  Under  those  circum- 
stances the  branch  is  profitable,  since  it  is  usually  not 
very  difficult  for  the  head  office  to  invest  the  funds  at 
a  profit  over  that  ratio  of  cost. 

Loss  OF  ISSUE  RIGHTS  STRIKES  LOCAL  BORROWERS  AND 
DEPOSITORS 

Next  examine  the  position  of  this  branch  when  the 
bank  has  no  issue  rights.  From  the  $100,000  of  discounts 
it  gets  $6,000  as  before;  the  same  amount,  $1,200,  is  re- 
ceived in  exchange,  commissions,  etc.  The  total  income 
is  unchanged  at  $7,200.  The  outgo  also  is  the  same — 

185 


A    RATIONAL    BANKING    SYSTEM 

$2,700  for  interest  on  deposits,  and  $5000,  for  expenses, 
or  $7,700  in  all.  And  the  net  outgo  or  deficit  remains  at 
$500.  The  change  occurs  in  the  capital  position  of  the 
branch.  First,  the  bank  loses  the  $35,000  net  funds  of 
which  it  had  the  use  through  the  note  circulation  of  the 
branch.  Next,  it  has  to  keep  on  hand  at  this  point  in 
$5  and  $10  Government  notes  an  average  of  $20,000, 
where  its  own  unissued  notes  had  sufficed  in  the  other 
case  (this  is  in  addition  to  the  $8,000  of  small  stuff  re- 
ferred to  in  the  other  description) .  That  makes  a  differ- 
ence of  $55,000. 

Now  the  relation  of  the  branch  with  head  office  is  as 
follows:  Deposits  exceed  loans  by  $30,000,  but  the  branch 
has  to  carry  $28,000  in  cash  and  balances,  leaving  a  sur- 
plus of  $2,000  for  the  use  of  head  offices  or  other  branches. 
The  cost  of  this  $2,000  is  $500  per  year,  or  25  per  cent. 
Under  these  conditions  this  branch  would  be  unprofitable, 
since  no  bank  can  take  funds  costing  25  per  cent,  per 
annum  and  make  anything  out  of  them.  So,  one  of  two 
things  would  happen :  Either  the  branch  would  be  closed 
and  the  people  of  that  locality  deprived  of  banking 
facilities  (or  thrown  into  the  hands  of  a  private  banking 
note  shaver),  or  the  bank  would  take  steps  to  make  the 
branch  profitable  through  raising  the  rate  of  discount 
and  lowering  the  rate  of  interest  on  deposits.  With  the 
average  rate  of  discount  at  7!  or  8  per  cent,  and  the  de- 
posit rate  at  2\  the  branch  might  perhaps  be  profitable, 
allowing  for  a  moderate  shrinkage  of  its  loans  and  de- 
posits owing  to  the  less  satisfactory  rates. 

CENTRAL  BANK  A  STUMBLING  BLOCK 

This  serves  as  another  illustration  of  the  benefit  de- 
rived by  the  general  public  from  the  conferring  upon 
good  commercial  banks  of  the  privilege  of  note  issue.  It 
also  shows  clearly  enough  how  the  existence  of  a  central 
bank  with  a  monopoly  of  note  issue  would  operate  to 

186 


THE    CURRENCY    QUESTION 

deprive  small  places  of  much-needed  banking  facilities, 
which  they  would  certainly  get  from  the  branch  banks 
of  the  future,  if  the  branch  banks  have  reasonably  liberal 
rights  of  issue.  Then,  if  the  banks  of  the  United  States 
are  permitted  to  develop  naturally  under  the  branch 
system,  by  which  each  institution  would  find  a  profit  in 
catering  to  the  needs  of  small  places,  a  central  bank 
would  become  in  a  large  measure  superfluous.  There  is 
good  reason  to  believe  that  the  large  branch  banks  of 
the  type  referred  to  could  and  would  do  all  that  the  cen- 
tral bank  could  do,  and  very  likely  they  would  perform 
the  several  services  and  duties  in  a  manner  more  satis- 
factory to  the  people,  because  they  would  be  much  more 
closely  in  touch  with  the  borrowing  and  depositing  classes. 
To  get  the  branch  banks  all  that  is  necessary  is  to  allow 
the  existing  banks  to  develop  along  natural  and  rational 
lines.  They  will  come  into  being  if  the  laws  are  made 
permissive.  There  is  no  need  to  create  anything  or  to 
introduce  new  complications.  They  will  supply  the  cur- 
rency that  will  respond  automatically  to  the  country's 
needs,  and  they  will  uphold  the  country's  honor  in  panics. 
Perhaps,  also,  they  would  regulate  speculation  and  the 
foreign  exchanges  as  satisfactorily  as  would  any  central 
bank  that  is  formed  in  the  United  States. 

THE  BOND  SECURITY  FOR  NATIONAL  BANK  NOTES 

Of  course  there  is  implied  in  these  schemes  the  retire-! 
ment   of   the   bond   secured  national  bank  notes;    and\ 
whenever  that  question  is  debated  the  matter  of  the  hold-  1 
ing  of  Government  bonds  by  the  banks  as  security  for/ 
note  issues  comes  up.     It  is  said  that  if  the  Government 
bonds  owned  by  the  national  banks  and  pledged  with  the 
United  States  Treasury  as  security  for   national    bank 
notes  outstanding  were  rendered  useless  for  note  circu- 
lation they  would  drop  in  price  so  much  as  to  inflict  a 
loss  of  quite  $60,000,000  upon  the  banks  owning  them. 
13  l87 


A    RATIONAL    BANKING    SYSTEM 

Of  course  I  do  not  know  what  arrangement  would  be  con- 
sidered by  Congress  to  be  expedient  or  practicable  as  a 
measure  for  changing  the  status  of  these  bonds.  But  to 
my  mind  there  is  no  doubt  whatever  as  to  the  course 
which  the  Government  should  take.  It  sold  those  bonds 
to  the  banks  and  got  a  price  higher  than  the  market  value 
on  account  of  the  valuable  consideration  attached  to  the 
bonds.  If  it  is  found  desirable  and  in  the  public  interest 
to  destroy  the  value  of  this  consideration  the  Government 
is  in  honor  bound  to  return  to  the  banks  the  surplus  price 
it  received  by  reason  of  the  consideration.  It  seems  to 
me  the  occasion  should  be  regarded  by  the  Government 
officials  as  an  operation  similar  to  that  which  takes  place 
when  a  worn  coinage  is  replaced  on  a  large  scale  by  sound 
full- weight  pieces. 

DISPLACING  THE  GOVERNMENT  NOTES 

If  the  currency  of  the  country  were  provided  by  strong 
branch  banks,  of  the  type  of  the  Bank  of  Minnesota  and 
the  Bank  of  Massachusetts,  which  had  the  right  to  issue 
notes  up  to  the  amount  of  paid-up  capital,  these  bank 
note  issues  would  easily  replace  the  national  bank  notes; 
and  they  would,  naturally  and  without  special  legislation, 
effectually  displace  the  Government  notes  of  $5,  $10,  $20, 
and  $50  denominations.  These  Government  issues  would 
then  possess  no  avenues  by  which  they  could  get  into  or 
remain  in  circulation.  It  is  practically  certain,  if  the 
banking  business  of  the  United  States  were  transferred 
to  the  hands  of  branch  banks  of  the  kind  described,  that 
the  gross  capital  of  the  banks  would  be  $2,000,000,000  in 
a  reasonably  short  time.  The  aggregate  capital  of  the 
national  banks  on  April  28,  1909,  was  $933,269,903,  and 
that  of  the  state  banks  $410,717,857.  With  the  absorp- 
tion of  outside  institutions  and  the  extension  of  the 
branches  into  thousands  of  new  places  large  capital  in- 
creases would  be  necessitated.  It  is  very  likely  that 

188 


THE    CURRENCY    QUESTION 

many  of  these  branch  banks  would  operate  with  capital 
largely  in  excess  of  the  amount  of  notes  they  could  main- 
tain in  circulation;  and  each  one  would  be  very  active  in 
withdrawing  the  notes  of  its  competitors  and  in  paying 
out  its  own.  Not  one  of  them  would  think  of  paying 
Government  "fives,"  "tens,"  or  "twenties"  over  their 
counters.  These  they  would  send  in  for  redemption,  and 
the  Government  notes  in  circulation  would  speedily  come 
to  consist  of  large  notes — $500,  $1,000,  $5,000,  and 
$10,000 — used  almost  exclusively  for  clearing-house  and 
reserve  purposes. 

SECURING  THE  BRANCH  BANK  ISSUES 

It  would,  of  course,  be  possible  to  make  the  branch 
banks'  notes  safe  and  as  surely  convertible  into  specie  on 
demand  as  are  the  existing  national  bank  notes.  A  first 
lien  on  the  assets  followed  by  a  mutual  guaranty  and  a 
redemption  fund  would  appear  sufficient  to  secure  that 
end,  especially  if  the  associated  guarantors  were  given 
adequate  rights  of  supervision  over  the  individual  issues. 
The  notes  might  be  made  a  first  lien  on  the  assets  without 
imperilling  the  depositors  if  the  right  to  issue  and  the 
right  to  extend  branches  were  confined  to  strong  banks 
with  a  large  paid-up  capital — say,  $3,000,000  or  $5,000,000 
— (Sir  Edmund  Walker,  president  of  the  Canadian  Bank  of 
Commerce,  thinks  that  a  branch  bank  with  the  privilege 
of  operating  everywhere  in  the  United  States  should  have 
a  capital  of  $10,000,000  at  least).  And  the  first  lien  on 
assets  could  be  made  the  basis  for  a  mutual  guaranty  by 
the  associated  banks  of  each  other's  notes.  Or,  if  it  were 
preferred,  a  tax  of  J  or  J  per  cent,  might  be  levied,  and 
the  accumulation  set  aside  to  redeem  notes  of  failed  banks. 
I  consider  that  the  prior  lien  arrangement  is  more  just  and 
equitable.  The  noteholders  are  secure  in  either  case. 
When  there  is  a  tax  levied  indiscriminately  on  all  banks 
for  the  purpose  of  securing  the  notes,  it  means  that  the 

189 


A    RATIONAL    BANKING    SYSTEM 

good  banks  are  levied  upon  to  protect  the  noteholders 
of  badly  managed  concerns.  Under  a  prior  lien  the  note- 
holders of  a  failed  bank  would  be  protected  at  the  expense 
of  the  depositors,  who  might  get  5  or  10  per  cent,  less  in 
dividends  because  of  the  preference  given  the  notes. 

A  SAFE  AND  FLEXIBLE  CURRENCY 

In  either  case  the  whole  branch  machinery  would  be 
available  for  the  circulation  and  redemption  of  notes. 
The  constant  efforts  of  each  bank  to  keep  its  own  circula- 
tion at  the  maximum  would  ensure  prompt  and  thorough 
redemption,  the  carrying  on  of  which  would  not  entail 
an  undue  expense  in  sorting,  express  charges,  etc.  Re- 
demption being  thorough,  the  incentive  to  issue  being 
always  present,  if  the  bank  notes  provided  the  sole  cur- 
rency of  the  country,  the  amount  in  circulation  would  at 
all  times  be  in  automatic  adjustment  with  the  country's 
need  of  circulating  medium.  Congestion  at  the  centres, 
with  its  attendant  invitation  for  rich  manipulators  to  rig 
the  markets  for  stocks  and  commodities,  would  not  be 
so  apt  to  occur  except  perhaps  during  the  stagnation 
that  followed  an  important  panic.  When  crop  moving 
came  round  there  would  be  every  probability  of  the 
branch  banks  being  in  position  to  easily  create  the  ad- 
ditional currency  required  for  the  financing  thereof. 

I  think  I  have  made  it  clear  that  branch  banks  of  the 
right  type  could  supply  currency  just  as  well  as,  if  not 
better  than,  a  central  bank  could  supply  it.  And  if  the 
privilege  of  issue  were  given  to  the  ordinary  banks  many 
country  districts,  and  city  districts  as  well,  would  enjoy 
valuable  banking  facilities  which  they  have  not  to-day, 
and  which  they  have  no  prospect  of  getting  under  the 
system  of  single-office  banks. 


XI 

HOW  THE   CHANGE   MIGHT   BE   EFFECTED 
AVOIDING  DESTRUCTION  OF  PROPERTY 

PERHAPS,  at  about  this  stage  of  the  relation,  the 
1  reader  who  is  a  banker,  acquainted  with  the  condi- 
tions prevailing  in  the  country,  will  be  moved  to  inter- 
rupt. "That  is  all  very  fine,"  he  may  say;  "the  picture 
you  draw  of  the  efficient  working  of  such  banks  as  the 
Bank  of  Massachusetts  and  the  Bank  of  Minnesota,  and 
of  the  benefits  they  confer  on  the  people,  is  attractive, 
but  it  is  high  time  for  you  to  describe  more  minutely  some 
of  the  details  as  to  how  the  transition  from  the  present 
style  of  banks  to  the  branch  type  can  be  made.  You 
doubtless  are  aware  that  one  reason  why  branch  banks 
have  not  been  more  fully  considered  as  a  remedy  for  exist- 
ing shortcomings  is  that  a  practical  method  of  introduc- 
ing them  without  destroying  the  value  of  the  stock  of 
the  existing  local  banks  is  difficult  to  find.  Have  you  a 
method  to  suggest  by  which  the  change  from  the  one 
system  to  the  other  might  be  made  without  inflicting 
great  damage  upon  the  owners  of  the  small  banks  and 
arousing  their  bitter  hostility?" 

In  answer  to  this  interpolation  I  must  admit  that  I 
have  no  positive  conviction  that  branch  banks  can  be 
introduced  without  damaging  the  value  of  the  stock  of 
some  of  the  existing  banks.  The  change  would  be  in  the 
nature  of  a  revolution,  and  revolutions  of  this  kind  quite 
frequently  are  damaging  to  the  owners  of  the  system  or 
process  that  is  discarded.  However,  I  consider  that  there 

191 


A    RATIONAL    BANKING    SYSTEM 

is  a  possibility  of  the  change  being  effected  without  caus- 
ing undue  loss;  and  in  this  chapter  I  shall  endeavor  to 
indicate  how  that  might  occur.  Connected  with  the 
sentiment  against  branch  banks,  which  has  its  origin  in 
the  fears  of  the  country  bankers  that  they  will  be 
destroyed,  is  another  fear  that  it  might  prove  diffi- 
cult or  impossible  to  regulate  and  control  large  branch 
banks,  and  to  prevent  gross  abuse  of  the  power  pos- 
sessed by  them.  This  point,  too,  will  be  dealt  with  in 
due  time. 

MISCONCEPTIONS  REGARDING  BRANCH  BANKS 

It  is  clear  that  some  people  are  opposed  to  branch 
banking  because  they  have  an  entirely  wrong  idea  as  to 
the  manner  in  which  the  banks  that  are  advocated  would 
be  organized  and  constituted.  I  asked  a  banker  from 
the  State  of  Delaware  what  he  thought  of  branch  banks. 
He  replied  that  a  branch  bank  opened  in  his  town  in  op- 
position to  the  local  banks,  but  it  could  do  no  business, 
and  it  had  to  close.  This  experience  would,  perhaps,  be 
repeated  in  different  localities,  and  the  bankers  and  other 
people  who  witnessed  it  would  not  get  therefrom  a  favor- 
able idea  as  to  the  usefulness  or  desirability  of  branch 
banks.  It  is  reasonably  safe  to  say,  however,  that  in 
most  of  the  cases  here  referred  to  the  branch  banks  were 
not  of  the  type  advocated  in  this  book.  I  have  no 
doubt  that  in  many  cases  these  unsuccessful  ventures 
were  the  offshoots  of  small  or  unimportant  concerns.  In 
other  words,  the  parent  institutions  had  not  the  size, 
strength,  or  prestige  required  for  successful  or  useful 
operation.  It  may  have  happened  sometimes  that  the 
opening  of  a  branch  by  one  of  these  concerns  represented 
a  forlorn  hope,  or  effort  to  attract  a  few  deposits,  in  some 
other  than  the  home  locality,  to  bolster  up  the  parent 
office  or  to  feed  it  with  additional  funds  for  financing  the 
needs  of  its  own  borrowers. 

192 


HOW   THE   CHANGE   MIGHT   BE   EFFECTED 
A  FIXED  CAPITAL  FOR  EACH  BRANCH 

Apparently  it  was  branch  banking  of  this  type  which 
the  Superintendent  of  Banking  in  New  York  State  had  in 
mind  when  he  initiated  the  recent  legislation  requiring  a 
parent  bank  to  provide  a  capital  of  $100,000  for  each 
branch  established.  As  a  matter  of  fact,  the  capital  of 
the  parent  bank  should  be  proportioned  to  the  amount 
of  the  gross  liabilities  rather  than  to  the  number  of 
branches.  Assuming  that  its  funds  are  well  and  profit- 
ably invested,  a  bank  is  able  to  make  the  best  earnings 
when  its  deposits  and  liabilities  are  many  times  its  capital 
and  surplus.  Thus  a  bank  with  capital  and  surplus  of 
$2,000,000  and  deposits  of  $30,000,000  would  likely  earn 
a  much  higher  ratio  on  its  proprietors'  funds  than  would 
another  with  capital  and  surplus  of  $15,000,000  and  de- 
posits of  $17,000,000,  although  both  have  the  same 
amount  of  resources  to  work  with — $32,000,000.  But, 
though  not  so  favorably  situated  for  earning  and  paying 
large  dividends,  the  business  of  the  latter  bank  is  on  a 
broader  basis  of  capitalization.  Approximately  half  its 
resources  are  its  own  property,  not  subject  to  withdrawal. 
It  should  be  said  that  many  banks  do  actually  carry  de- 
posits ten  or  fifteen  times  as  large  as  capital  and  surplus. 
The  high  proportion  of  liabilities  to  capital  and  surplus 
need  not  necessarily  be  dangerous  provided  the  officers 
are  careful  to  carry  at  all  times  a  sufficient  proportion  of 
assets  that  are  immediately  available. 

So  that  if  the  capital  is  to  be  proportionate  to  anything 
it  should  be  the  liabilities.  When  applied  to  great  mer- 
cantile banks,  operated  as  they  should  be  operated,  the 
requirement  of  $100,000  capital  for  each  branch  would 
simply  have  the  effect  of  preventing  the  establishment 
of  branches  in  many  small  places.  In  a  locality  where 
the  natural  demand  for  discounts  exceeded  the  deposits 
by  one  or  two  hundred  thousand  dollars  it  would  not  be 
so  great  a  hardship  to  be  required  to  provide  $100,000,  or 


A    RATIONAL    BANKING    SYSTEM 

any  other  fixed  sum,  against  the  particular  branch  es- 
tablished there ;  but  if  a  deposit  locality  is  taken — a  place 
where  deposits  far  exceed  the  loans — it  is  a  different  mat- 
ter altogether.  Since  the  branch  in  that  locality  could 
not  use  a  dollar  of  the  new  capital  required  to  be  pro- 
vided for  its  use,  the  requirement  cannot  but  operate  to 
prevent  the  establishment  of  branches  in  such  places. 

BRANCH  BANKS  AND  CHAIN  BANKS 

It  is  quite  probable  that  some  of  the  methods  practised 
in  New  York  and  other  cities  prior  to  the  1907  panic 
would  have  an  effect  in  disposing  people  against  branch 
banks,  because  of  their  confusing  with  the  branch  banks 
the  so-called  chain  banks  as  manipulated  by  the  Heinze- 
Morse  faction  and  by  other  factions.  I  may  as  well  ex- 
plain that  chain  banks  of  this  kind  have  scarcely  any- 
thing in  common  with  the  branch  bank  idea.  One  of  the 
worst  features  of  the  system  of  local  small  banks  is  that 
it  tends  to  bring  about  personal  domination,  through  the 
exercise  of  stock  control  by  one  man  or  by  a  clique  or 
set  of  men.  By  the  chain  system,  as  practised  by  Heinze 
and  Morse,  this  objectionable  feature  of  personal  domina- 
tion was  extended  over  a  number  of  institutions  instead 
of  being  confined  in  each  case  to  one  bank.  The  system 
has  no  connection  or  similarity  with  branch  banks  as  they 
exist  in  the  great  European  countries,  in  Canada,  or 
Australia. 

In  the  United  States  these  chains  of  banks  are  found 
in  the  country  districts  as  well  as  in  the  large  cities.  A 
correspondent  of  the  New  York  Evening  Post  at  Omaha, 
Nebraska,  described  in  the  issue  of  April  25,  1908,  how 
the  bank  chains  were  worked  in  the  West.  After  pointing 
out  how  towns  and  villages  sprang  up  on  the  Dakota 
plains  with  the  building  of  new  railway  lines  he  says: 
"Among  the  first  institutions  to  be  started  in  every  town 
is  a  bank.  Frequently  it  is  there  before  the  railroad 

194 


HOW   THE   CHANGE   MIGHT  BE   EFFECTED 

arrives.  The  rivalry  for  the  title  'First '  (either  state  or 
national)  bank,  is  keen,  and  a  half  dozen  applications  are 
frequently  made.  Two  or  three  banks  in  operation  before 
the  town  is  a  month  old  is  common.  Many  of  these  are 
practically  real  estate  agencies  and  loan-broking  firms 
with  the  word  'bank'  as  an  appendage  for  good  will. 
They  handle  farms,  make  farm  loans,  and  write  insurance 
along  with  receiving  deposits. 

"  The  next  step  in  the  development  of  these  banks  has 
been  their  combination  into  chains.  The  farm  mortgages 
given  by  the  farmers  who  move  on  the  new  lands  which 
they  wish  to  improve,  and  borrow  money  for  the  purpose, 
have  to  be  sold ;  hence  the  president  goes  to  a  large  West- 
ern city  and  starts  an  investment  company  which  makes 
a  specialty  of  selling  farm  loans.  He  leaves  the  bank  in 
charge  of  a  cashier,  who  is  usually  a  young  man  anxious 
to  make  a  showing.  The  president  establishes  other 
banks  of  this  sort  until  he  has  a  string  reaching  across 
several  counties.  A  banker  who  left  for  Spokane  last 
month  was  president  of  twenty  banks  of  this  sort  and 
lived  in  luxury  without  visiting  them  oftener  than  enough 
to  keep  in  touch  with  their  management." 

STRINGS  OP  WESTERN  BANKS 

Banks  of  this  kind  are  scarcely  calculated  to  inspire 
respect  for  the  banking  business.  As  a  matter  of  fact, 
the  mere  mention  of  them  is  sufficient  to  bring  a  smile 
to  the  face  of  a  banker  accustomed  to  the  strong,  well- 
organized  branch  banks  of  other  countries.  Properly 
speaking,  many  of  them  are  not  banks  at  all.  The  men 
operating  and  controlling  them  may  know  very  little  of 
banking  principles.  Not  long  ago  the  American  Banker 

published  the  following  item:    " of  the Bank 

in  Oklahoma  City  is  making  arrangements  to  start  a  string 
of  fifteen  banks  throughout  the  state,  having  placed  an 
order  with  a  prominent  safe  concern  for  safes."  The  item 


A    RATIONAL    BANKING    SYSTEM 

moved  the  Financial  Post,  of  Toronto,  Canada,  to  remark 
that  it  would  appear  that  safes  were  the  most  important 
factor  in  starting  a  string  of  banks  in  the  newer  territories 
of  the  United  States.  The  editor  then  mentions  the  fact 
of  the  National  City  Bank  of  New  York  having  pur- 
chased the  controlling  interest  in  the  Exchange  National 
Bank  of  Spokane,  and  a  large  block  of  the  stock  of  the 
Traders'  National  Bank  of  the  same  city — the  movement 
apparently  being  part  of  a  preparatory  plan  of  the  Stand- 
ard Oil  interests  to  make  large  investments  on  the  Pacific 
Coast.  After  mentioning  also  the  Witham  chain  of 
banks  in  Georgia,  the  paper  concludes:  "In  these  in- 
stances we  have  quoted  the  branch  bank  system  in  a  dis- 
guised form,  and  one  which  involves  most  of  the  draw- 
backs and  few  of  the  merits  of  the  English  or  Canadian 
system.  The  rooted  objection  to  non-branch  banks  is 
found  in  individual  control.  In  Great  Britain  and  in 
Canada  it  is  not  the  individual  but  the  institution  which 
is  paramount.  In  the  United  States,  under  the  legal 
inhibition  of  the  branch  system,  the  individual  promoter 
must  necessarily  be  the  controlling  force.  His  branches 
are  all  separate  corporations,  and  any  cohesion  they  pos- 
sess is  centred  in  the  one  person.  This  movement  for 
'strings'  of  banks  is  likely  to  continue.  It  suggests  that 
the  American  bankers  may  as  well  face  the  inevitable; 
but  instead  of  having  branch  banking  in  its  most  ob- 
jectionable form,  they  should  advocate  a  system  which 
long  experience  in  other  countries  has  proved  most 
desirable." 

ATTEMPTS  TO  INTRODUCE  COHESION 

It  might  be  said,  in  addition,  that  a  number  of  other 
banking  reforms  and  changes  instituted  recently,  es- 
pecially since  the  1907  panic,  constitute,  like  the  above- 
mentioned,  attempts  to  engraft  some  good  features  of 
branch  banking  upon  the  localized  system.  As  examples, 

196 


HOW  THE  CHANGE   MIGHT   BE  EFFECTED 

I  might  mention  the  provision  for  the  currency  associa- 
tions passed  just  before  the  last  Presidential  election,  and 
the  scheme  more  recently  devised  by  the  Comptroller  of 
the  Currency,  under  the  terms  of  which  officers  of  the 
clearing-houses  are  to  co-operate  with  the  bank  examiners 
in  trying  to  prevent  reckless  banking.  Though  the  main 
design  to  be  accomplished  by  the  currency  associations 
is  to  provide  currency  during  a  panic,  it  is  also  hoped  that 
in  this  plan  co-operative  action  will  be  achieved,  or  a 
measure  of  cohesion  between  the  disunited  offices;  and 
from  the  second  plan  it  is  hoped  that  a  more  efficient 
inspection  or  supervision  will  result.  But  so  long  as 
the  various  banks  retain  their  independence  it  must 
be  that  co-operation  among  them  can  never  pass  a  cer- 
tain point ;  for  each  independent  unit  will  run  its  af- 
fairs as  it  pleases  and  for  its  own  particular  good. 
There  will  be  few  instances  of  a  bank  taking  a  losing 
position  for  the  benefit  of  an  association  or  of  the  coun- 
try. 

Another  example  of  the  way  in  which  the  branch  bank 
idea  is  spreading  in  the  United  States,  in  spite  of  hostile 
laws,  is  found  in  the  1909  report  of  the  Bank  Commissioner 
for  the  State  of  Wisconsin.  He  cites  the  case  of  a  com- 
pany with  headquarters  in  Minneapolis,  which  he  said 
owned  a  controlling  interest  in  more  than  fifty  banks 
in  Wisconsin,  Iowa,  Minnesota,  and  the  Dakotas.  He 
also  states  that  two  other  companies  have  recently  been 
organized  in  Minneapolis  for  the  purpose  of  acquiring 
control  of  banks  now  in  existence,  and  of  organizing  new 
banks. 

His  objections  to  this  method  of  combining  the  banks 
are:  The  president  and  cashier  of  the  bank  are  usually 
outside  men  with  only  a  few  local  directors;  the  man- 
agement is  directed  by  the  holding  company;  and  loans 
are,  in  the  majority  of  cases,  made  to  parties  resident 
outside  the  state. 

197 


A    RATIONAL    BANKING    SYSTEM 
A  SOUTHERN  COMBINATION 

A  news  item  in  the  New  York  Financier  of  April  26, 
1909,  is  full  of  suggestion  as  to  the  line  along  which  the 
movement  for  branch  banks  might  with  advantage  pro- 
ceed. It  is  a  despatch  from  Aiken,  South  Carolina,  and 
runs  as  follows:  "The  proposition  to  combine  the  Bank 
of  Aiken,  the  Bank  of  Graniteville,  and  the  Bank  of  Barn- 
well  into  one  institution,  to  be  known  as  the  Bank  of 
Western  Carolina,  has  been  favorably  acted  upon  by  the 
stockholders  of  the  Bank  of  Aiken.  The  stockholders  of 
the  Bank  of  Barnwell  will  act  on  April  26th,  and  those  of 
the  Bank  of  Graniteville  at  a  later  date.  The  merged 
institution  will  have  its  main  office  at  Aiken,  and  will  give 
the  three  towns  one  of  the  strongest  banking  institutions 
in  the  South.  The  three  banks  at  present  have  total 
resources  of  over  a  million  dollars.  There  is  much  en- 
thusiasm over  the  prospect." 

THE  RIGHT  TYPE  OF  BRANCH  BANK 

Without  regard  to  the  degree  of  success  that  may  at- 
tend this  particular  combination  it  can  be  said  that  it 
appears  as  if  combinations  of  this  kind  open  the  way  for 
the  acquisition  of  a  type  of  branch  banks  that  would 
naturally  evolve  into  a  banking  system  offering  a  reason- 
able protection  for  the  mercantile  and  industrial  borrowing 
interests  during  a  panic  or  crisis,  and  providing  facilities 
for  carrying  on  large  enterprises  without  making  it  neces- 
sary for  borrowers  to  appeal  to  all  and  sundry  for  accom- 
modation. The  banking  system  thus  evolved  might  also 
be  expected  to  care  for  and  encourage  foreign  trade  better 
than  is  done  by  the  existing  system.  Finally,  the  stock- 
holdings would  be  scattered  widely  over  the  land,  en- 
suring a  reasonably  certain  prospect  that  due  considera- 
tion would  be  given  to  local  or  sectional  interests.  Take 
the  three  banks  referred  to  in  the  preceding  paragraph: 

198 


HOW   THE   CHANGE   MIGHT   BE   EFFECTED 

If  the  combination  is  really  effective  and  the  management 
capable  and  honorable,  the  stock  of  each  institution 
should  be  more  valuable  after  the  consolidation,  because 
the  business  can  be  held  at  the  same  or  a  larger  volume 
under  lessened  executive  expense.  The  Aiken  executive 
would  be  impelled  to  give  every  reasonable  encourage- 
ment to  the  industrial  and  commercial  development  of 
the  other  two  places,  by  the  wish  to  maintain  or  increase 
profits,  to  say  nothing  of  the  fact  that  the  local  stock- 
holding in  the  other  places  would  exert  its  influence  upon 
them. 

Carry  the  idea  further  and  suppose  this  Bank  of  West- 
ern Carolina  eventually  forms  part  of  a  bank  with  branch- 
es scattered  thickly  through  several  Southern  states. 
Honestly  and  wisely  administered,  would  it  not  be  a 
much  more  powerful  factor  in  building  up  the  South  and 
in  strengthening  the  financial  fabric  of  the  United  States 
than  the  aggregation  of  its  several  units  would  be  while 
retaining  their  independent  .  character?  The  stock- 
holding of  the  bank  so  constituted  would  be  scattered  in 
every  district  where  there. was  a  branch;  and  the  task  of 
the  Government's  supervising  officers  would  be  sim- 
plified immensely.  Instead  of  one  hundred  or  one  hun- 
dred and  fifty  small  institutions  to  be  supervised,  there 
would  be  only  one  bank. 

FREE  AND  NATURAL  DEVELOPMENT  DESIRABLE 

It  is  not  to  be  desired  that  this  state  of  affairs  should 
come  about  as  directed  by  the  laws  or  through  compulsion. 
At  the  Denver  Convention  of  the  American  Bankers' 
Association  Sir  Edmund  Walker  suggested  that  if  branch 
banking  were  merely  made  permissive  it  could  hardly 
make  its  way  unless  it  proved  worthy.  If  the  legal  re- 
strictions and  prohibitions  were  removed  and  there  was 
seen  a  transformation  of  independent  banks  into  branch 
banks,  as  in  the  case  of  the  Western  Carolina  affair,  on  a 

199 


A    RATIONAL    BANKING    SYSTEM 

large  scale,  it  would  be  fairly  good  proof  that  the  move- 
ment was  economically  sound.  It  would  be  a  mark  or 
sign  that  for  the  first  time  in  recent  generations  the 
banking  development  of  the  United  States  was  pro- 
ceeding naturally.  If  the  prohibition  against  branches 
were  removed,  and  the  privilege  of  note  issue  conferred 
upon  banks  with  a  respectably  large  minimum  of  paid-up 
capital,  it  is  practically  certain  that  in  all  parts  of  the 
country  the  banks  would  combine  so  as  to  be  eligible  for 
participating  in  the  benefits  of  note  issue  against  general 
assets.  Apparently  there  is  a  growing  disposition  on  the 
part  of  the  Federal  and  state  authorities  to  conclude  that 
in  the  industry  and  trade  of  a  great  country  like  the 
United  States  it  is  but  natural  for  the  development  to  be 
in  the  direction  of  large  combinations  and  corporations. 
They  are  coming  more  to  the  belief  that  it  is  better  to  ac- 
cept this,  to  cease  trying  to  prevent  or  check  the  tendency, 
and  to  bend  their  energies  toward  regulating  the  combi- 
nations and  preventing  them  from  abusing  their  power. 
They  may,  in  time,  come  to  view  banking  in  the  same  way. 

PROMOTING  A  COMBINATION 

Suppose  there  began  among  the  country  banks  a  move- 
ment to  combine.  The  task  of  bringing  the  banks  to- 
gether would  call  for  the  services  of  a  number  or  pro- 
moters. It  would  be  an  attractive  proposition  which 
a  promoter  could  lay  before  the  stockholders  of  the  par- 
ticular circle  of  banks  he  desired  to  combine.  He  would 
first  select  the  section  of  the  state  or  country  which  he 
wished  the  bank  to  cover.  Then  he  would  choose  the 
several  cities,  towns,  and  villages  in  which  it  would  be 
advisable  to  be  represented  and  in  each  place  select  a 
bank  to  be  approached.  He  would  also  need  to  provide 
a  general  manager  and  an  executive  staff.  If  it  hap- 
pened that  the  promoter  himself  was  a  skilled  banker,  he 
might  retain  the  general  management  for  himself.  But, 

200 


HOW   THE   CHANGE   MIGHT   BE  EFFECTED 

as  the  qualities  required  for  bringing  a  score  or  two  score 
independent  banks  into  a  combination  such  as  this  are 
somewhat  different  from  the  qualities  required  for  the 
general  management  of  a  large  branch  bank,  it  is  likely 
that  in  many  cases  the  promoters  would  receive  com- 
pensation for  their  services  in  cash  or  in  stock  which  they 
might  easily  convert  into  cash. 

AN  ATTRACTIVE  PROPOSITION 

In  laying  his  proposition  before  the  officers  and  di- 
rectors of  a  local  bank,  the  promoter  would  first  explain 
the  method  to  be  followed.  The  combination  would  not 
be  a  case  of  one  bank  swallowing  another.  Nothing  like 
that  at  all.  It  would  instead  be  a  confederation  of  banks 
for  the  profit  and  well-being  of  each  unit  as  well  as  for 
the  good  of  the  state  and  country.  The  assets  of  each 
bank  agreeing  to  join  the  scheme  would  be  valued  by  an 
expert  familiar  with  business  conditions  in  that  part  of 
the  country.  If  the  promoter  has  succeeded  in  enlisting 
the  support  of  a  number  of  respectable  institutions,  so 
as  to  ensure  the  respectability  of  the  proposed  con- 
solidation, he  would  be  taken  seriously  enough.  There 
would  be  several  circumstances  which  would  enable  him 
to  make  an  attractive  offer  for  the  stock  of  a  bank  the 
adhesion  of  which  he  desired.  First,  there  would  be  the 
economy  of  operation  possible  under  the  branch  system. 
Next,  the  extra  profit  to  be  gained  from  the  exercise  of 
the  right  to  issue  notes.  Third,  there  would  be  the  pos- 
sibilities in  the  way  of  expansion  of  business  through 
opening  in  many  places  not  possessing  banking  facilities. 
All  these  would  have  a  tendency  to  increase  the  profit- 
earning  capacity  of  the  stock  going  into  the  consolidation. 
Another  consideration  would  be  that  the  stock  itself  would 
become  more  easily  marketable.  Everybody  knows  that 
nowadays,  as  a  rule,  there  is  but  a  narrow  market  for  the 
stocks  of  banks  in  small  places.  If  a  stockholder  wishes 

201 


A    RATIONAL    BANKING    SYSTEM 

to  sell  his  holding  the  chances  are  he  will  have  to  wait 
till  a  buyer  appears.  To  make  an  immediate  sale  it  might 
be  necessary  to  concede  five  or  ten  points  from  the  price 
recorded  in  the  last  previous  sale.  But  the  stock  of  a 
large  branch  bank  would  have  a  recognized  market  value. 
At  the  particular  financial  centre  where  its  head  office 
was  located  there  might  be  transactions  every  day,  as 
both  buyers  and  sellers  would  be  in  evidence  continually. 
So,  providing  the  valuation  of  the  assets  did  not  reveal 
rottenness,  the  promoter  could  safely  offer  a  higher  price 
for  the  stock  of  the  local  bank  (to  be  paid  in  stock  of  the 
consolidated  bank)  than  it  was  selling  for  in  the  local 
market,  because  as  a  branch  it  would  earn  more  than  as 
an  independent  concern. 

THE  STOCKHOLDERS — A   TRUE    DEMOCRACY 

The  strong  points  about  this  proposition  would  be  ap- 
parent to  any  intelligent  body  of  local  stockholders.  A 
bank  formed  in  this  manner,  through  the  combination  of 
a  number  of  banks  in  the  several  places,  would  command 
the  respect  and  confidence  of  depositors  and  business 
men.  It  would  be  possible  to  ensure  that  there  would 
not  be  domination  of  its  affairs  by  any  particular  institu- 
tion or  clique,  for  the  stockholding  would  be  distributed 
through  a  wide  territory,  and  the  larger  places  would 
hold  sufficient  stock  to  count  in  the  election  of  directors. 
The  board  and  the  principal  officers  would  necessarily  be 
men  enjoying  the  confidence  of  the  general  body  of  stock- 
holders. Nor  can  it  be  asserted  that  a  branch  bank  so 
constituted  would  be  neglectful  of  or  indifferent  to  the 
needs  of  any  of  the  localities  it  served,  or  that  it  would 
draw  the  funds  that  were  needed  in  the  country  districts 
away  to  the  centres.  Such  banks  would  constitute  an 
eminently  rational  solution  of  the  banking  problem.  An 
institution  of  this  type  would  gradually  extend  its  opera- 
tions over  the  state  or  section  in  which  it  was  located. 

202 


HOW   THE   CHANGE   MIGHT   BE   EFFECTED 

It  might  require  also  an  agency  at  New  York,  and  per- 
haps at  other  centres.  At  New  York  it  would  be  neces- 
sary to  lend  at  call  and  to  invest  in  bonds  and  stocks; 
but  it  is  easy  to  see  that  its  operations  there  would  be 
absolutely  free  from  suspicion  of  control  by  the  powerful 
market  interests  of  New  York  City. 

AN  ABSOLUTE  PREVENTIVE  OF  CLIQUE  CONTROL 

It  will  be  well  at  this  point  to  take  account  of  the  pos- 
sibility of  prominent  financiers  of  New  York  or  Chicago 
entering  into  an  aggressive  campaign  for  the  purchase  of 
stock  control  of  branch  banks  in  various  parts  of  the 
country.  A  development  of  that  kind  is  not  at  all  to 
be  desired.  Recent  happenings  in  New  York  City  in 
connection  with  the  acquisition  of  control  over  several 
large  trust  companies  by  an  interest  which  already  pos- 
sessed the  control  over  a  very  large  aggregation  of  bank- 
ing institutions  indicate  that  unless  something  is  done 
to  prevent  it  this  form  of  activity  may  be  much  in  evi- 
dence. I  cannot  see  any  convincing  reason  why  it  is 
necessary  for  those  powerful  financiers  to  have  absolute 
control  of  the  banking  institutions  that  carry  through 
their  various  transactions.  In  many  respects  it  would 
conduce  to  cleaner  and  sounder  banking  if  the  banks 
that  were  to  advance  the  funds  for  great  operations  of 
this  kind  were  known  to  be  free  from  the  domination  of 
their  borrowers.  At  any  rate  a  distinguished  French- 
man has  indicated  how  the  High  Finance  of  the  cities 
can  be  effectively  prevented  from  extending  its  domina- 
tion over  banking  institutions  in  different  parts  of  the 
country.  In  the  Annual  Financial  Review  number  of 
the  New  York  Evening  Post,  published  December  31, 
1909,  M.  Paul  Leroy-Beaulieu  gives  his  view  of  the 
financial  situation  in  America  as  it  then  existed.  Com- 
menting on  news  just  received  of  a  sale  of  American 
company  shares  placing  corporations  with  a  very  large 

14   "  2°3 


A    RATIONAL    BANKING    SYSTEM 

aggregate  capital  under  one  control,  M.  Leroy- Beau- 
lieu  said:  "This  evil  financial  custom  of  the  United 
States  does  not  exist  in  France.  If  done  away  with  it 
might  be  possible  to  hold  your  trusts  within  bounds. 
This  would  certainly  be  better  than  your  present  con- 
tradictory policies,  now  granting  them  every  liberty  and 
now  trying  to  suppress  them  altogether.  This  despatch 
says  that  Mr.  Morgan,  having  bought  the  majority  of 
stock  of  the  Equitable,  will  consequently  control  the 
finances  of  that  company  with  all  its  ramifications. 
Now  such  ownership  in  France  gives  no  such  power  or 
control.  The  number  of  votes  allowed  to  a  single  share- 
holder of  a  company  is  strictly  limited.  The  English  for- 
got this  when  they  bought  up  the  Suez  shares  held  by 
the  old  Khedive ;  they  expected  it  would  secure  them  the 
majority  of  the  votes  since  it  gave  them  the  majority 
of  shares.  There  was  great  disappointment  when  I 
pointed  to  the  text  of  the  statutes,  which  limit  to  one 
hundred  votes  any  one  shareholder,  no  matter  how 
many  shares  he  may  possess.  It  is  not  easy  to  evade 
this  essential  rule  by  dividing  up  one's  shares  among 
fictitious  holders,  for  this  constitutes  a  penal  offence  in 
French  law.  I  am  sure  that  something  similar,  limiting 
the  voting  power  of  great  shareholders,  would  also  limit 
the  too-great  power  of  your  trusts  and  combines." 

LIMITATION  OF  VOTING  POWER 

Here  is  indicated  a  sure  and  safe  method  by  which  the 
branch  banks  might  be  forever  delivered  from  domina- 
tion by  great  metropolitan  stockholders.  Let  it  be  pro- 
vided that  in  the  case  of  all  banks  which  have  the  privi- 
lege of  establishing  branches  and  issuing  notes  to  serve 
as  currency  the  stock  shall  be  strictly  limited  in  voting 
power.  A  maximum  of  one  hundred  votes  for  any  one 
shareholding,  with  a  provision  that  the  division  of  shares 
among  fictitious  holders  should  constitute  a  penal  offence, 

204 


HOW   THE   CHANGE   MIGHT   BE  EFFECTED 

would  make  it  entirely  useless  for  restless  or  ambitious 
financial  schemers  to  try  to  obtain  control  of  the  branch 
banks  in  the  manner  commonly  followed  at  present.  To 
limit  the  voting  power  of  the  stock  need  not  necessarily 
impair  its  investment  value.  It  is  often  the  case,  under 
the  present  system,  that  a  certain  interest  which  has  in- 
vested heavily  in  a  railway,  an  industrial  concern,  or  a 
financial  concern,  is  obliged  to  buy  the  stock  control  in 
order  to  safeguard  its  investment.  If  the  parties  did  not 
take  that  precaution  they  might  some  day  discover  that 
outsiders  inimical  to  them  had  secured  a  majority  of  the 
stock,  and  that  there  was  a  good  prospect  of  their  in- 
vestment being  destroyed  or  seriously  damaged.  In 
other  words,  large  investors  are  sometimes  compelled  in 
self  defence  to  acquire  the  stock  control  of  the  prop- 
erties in  which  they  are  interested.  Limitation  of 
the  voting  power  of  the  branch  banks'  stock  would 
give  these  large  investors  the  immunity  they  required, 
and  would  deliver  them  from'  the  necessity  of  acquir- 
ing 51  per  cent,  of  the  stock  for  themselves  or  their 
friends. 

I  think  that,  in  the  way  I  have  described,  the  owners 
of  the  sound  and  prosperous  independent  banks,  on  going 
into  a  combination,  would  receive  property  more  valuable 
than  that  which  they  surrendered.  Quite  probably  many 
of  the  banks  which  were  in  reality  not  in  very  good  shape 
would  be  passed  off  on  the  consolidations  on  terms  better 
than  the  owners  had  any  right  to  expect.  But  there 
would  be,  almost  surely,  a  number  of  institutions  which 
were  unable,  because  of  their  bad  condition,  to  form 
themselves  into  branch  banks  of  the  desired  respectability. 
Needless  to  say,  these  are  the  weak  spots  in  the  banking 
situation  as  it  exists  to-day.  The  owners  of  their  stock 
are  fated  to  lose  heavily  in  any  case,  and  if  they  were  put 
out  of  existence  through  the  institution  of  branch  banks 
it  would  hardly  be  fair  to  lay  the  blame  altogether  upon 
the  change  of  system. 

205 


A    RATIONAL    BANKING    SYSTEM 


THE  DIRECTORATES 

The  boards  of  banks  having  their  head  offices  outside 
of  New  York  City  would  be  composed  almost  altogether 
of  leading  merchants,  manufacturers,  and  business  men 
devoting  themselves  to  some  calling  other  than  finance 
(these  are  the  classes  of  men  who  would  get  the  votes 
if  the  voting  power  of  the  stock  was  limited) .  And,  even 
in  the  cases  of  those  banks  which  had  their  head  offices 
in  New  York  City,  probably  many  of  them  would  have 
boards  in  which  commercial  interests  were  in  a  decided 
majority. 

These  directors  would  be  held  strictly  responsible  for 
the  proper  use  of  the  banks'  funds.  Their  responsibility 
would  be  heavy  enough  to  induce  them  to  take  measures 
calculated  to  keep  them  informed  as  to  the  real  condition 
of  their  respective  banks.  It  would  be  idle  to  expect 
business  men  of  this  type  to  undertake  to  personally  fol- 
low the  management  through  the  details  of  every  trans- 
action, or  to  personally  examine  the  books  and  records 
so  as  to  make  sure  that  the  affairs  of  the  bank  were  as 
they  should  be,  and  as  the  professional  general  manager 
represented  them  to  be.  A  director  of  a  great  institution 
could  not  do  that  unless  he  gave  a  large  proportion  of 
his  time  to  the  study  of  branch  returns,  reports,  and  cor- 
respondence, and  to  trips  around  the  branches,  unless,  in 
other  words,  he  neglected  his  other  business  in  order  to 
attend  to  the  affairs  of  the  bank.  It  is  not  desirable  that 
this  should  happen.  This  director  is  not  an  expert  bank- 
er; he  might  not  become  an  expert,  even  if  he  had  a  seat 
on  a  bank  board  for  twenty  or  thirty  years.  His  quali- 
fications fit  him  rather  for  the  conduct  of  the  mercantile 
or  manufacturing  business  in  which  he  has  been  en- 
gaged, and  in  which  quite  probably  he  has  made  his 
fortune.  It  is  best  that  he  continue  to  devote  himself 
mainly  to  that  business. 

206 


HOW   THE   CHANGE   MIGHT   BE  EFFECTED 
CHECKS  UPON  THE  MANAGEMENT 

But  a  large  branch  bank  receiving  deposits  through- 
out a  wide  territory  must  have  a  board  of  directors  com- 
posed of  men  whom  the  people  of  the  country  know  to 
be  substantial;  it  is  advisable  also  that  these  directors 
should  have  a  large  responsibility.  It  is  they  who  must 
hire  and  supervise  the  professional  manager  who  has 
charge  of  the  bank's  operations.  They  must  satisfy 
themselves  that  this  manager  is  capable  and  trustworthy, 
and  devise  a  scheme  which  will  prevent  him  from  com- 
mitting the  bank  to  important  risks  or  important  opera- 
tions outside  of  their  knowledge.  This  could  be  done 
through  appointing  a  permanent  auditor  or  chief  inspector 
resident  in  the  head  office,  having  access  to  all  books  and 
papers,  and  endowed  with  the  powers  necessary  for  check- 
ing up  the  general  manager.  This  man  is,  of  course,  a 
servant  of  the  bank,  but  he  derives  his  power  from  the 
directors  rather  than  the  general  manager.  In  the  head 
office  of  a  great  bank  with  many  branches  there  would 
of  necessity  be  several  highly  paid  officers  of  considerable 
consequence,  who,  though  subject  to  the  general  man- 
ager's authority,  would  be  too  powerful  for  him  to  over- 
ride in  an  attempt  to  misuse  the  bank's  funds,  and  too 
well  conversant  with  its  affairs  to  be  easily  deceived  by 
him. 

PUBLICATION  OF  THE  STATEMENTS 

Thus  a  substantial  board  of  truly  representative  direc- 
tors, with  reasonably  full  civil  responsibilities,  holding 
office  by  virtue  of  the  suffrages  of  the  general  body 
of  stockholders  rather  than  through  the  ownership  of  a 
dominating  interest  in  the  capital  stock,  and  removable 
without  difficulty  for  misconduct,  would  be  one  of  the 
main  safeguards  possessed  by  the  scattered  owners  of  the 
bank.  The  same  board  of  directors,  reinforced  by  the 
stockholding  body,  all  subject  to  a  double  liability  on 

207 


A    RATIONAL    BANKING    SYSTEM 

their  stock,  should  be  of  some  consequence  in  giving  the 
bank  a  high  standing  and  good  credit  in  every  part  of  the 
country.  Also  regular  statements  of  position  should  be 
required  from  each  bank;  and  the  Government  might 
publish  the  statements  in  such  manner  as  to  enable  the 
interested  depositor  and  the  student  to  follow  the  changes 
of  position  of  the  individual  bank  or  banks  he  desires  to 
watch.  A  statement  only  five  times  a  year  would  be  too 
infrequent.  Monthly  statements  would  best  cover  the  re- 
quirement, and  the  statements  should  be  in  a  form  that 
would  enable  an  intelligent  and  critical  body  of  observers 
to  subject  the  affairs  of  each  bank  to  a  searching  analysis. 
It  would  be  impracticable  for  a  bank  with  branches  scat- 
tered far  and  wide  to  furnish  to  the  Government  bureau 
a  composite  statement  until  perhaps  two  weeks  or  three 
weeks  after  the  date  set  for  the  statement  day.  If  the 
statement  day  fell  on  the  end  of  the  month  it  might  be  the 
loth  or  the  i5th  of  the  following  month  before  the  head 
office  of  the  bank  had  the  returns  from  all  distant  branches 
in  hand.  And  after  that  the  branch  returns  would  have 
to  be  combined  into  a  general  return  showing  the  position 
of  the  whole  bank.  In  Canada  it  is  usually  about  the 
igth  or  2oth  of  the  following  month  that  the  bank  state- 
ment for  the  end  of  each  month  appears.  And  it  is  ex- 
pedited through  allowing  the  most  distant  branches  to 
treat  the  23d  or  an  earlier  date  as  the  end  of  the  month 
for  statement  purposes. 

IMPRACTICABILITY  OF  A  WEEKLY  STATEMENT 

It  might  be  possible  to  publish  a  weekly  statement 
which  would  permit  the  speculative  and  business  in- 
terests to  determine  the  weekly  fluctuations  in  cash  and 
liquid  balances;  but  it  would  necessarily  be  incomplete 
and  it  might  not  prove  entirely  satisfactory.  The  cash 
carried  at  the  branches  in  the  several  reserve  centres  by 
each  bank,  the  total  of  call  loans  on  bonds  and  stocks 

208 


HOW   THE   CHANGE    MIGHT   BE  EFFECTED 

and  of  balances  in  the  international  banks,  might  be  given 
along  with  some  other  particulars;  but  without  the  fluc- 
tuations of  the  liabilities  these  particulars  would  not 
convey  very  valuable  information.  It  would  hardly  be 
practicable  for  a  large  branch  bank  to  publish,  on  the  day 
following  the  statement  date,  a  weekly  statement  of  its 
affairs,  as  the  New  York  banks  now  do.  Before  it  could 
be  done  all  the  branches  would  have  to  telegraph  their 
balances  to  the  head  office,  and  that  would  make  a  heavy 
bill  of  costs. 

It  would  be  a  matter  of  the  first  importance  to  have 
these  bank  statements  true  and  faithful.  To  wilfully 
misrepresent  the  position  of  a  bank  of  this  kind  would  be 
a  heinous  offence,  for  which  the  severest  penalties  should 
be  provided.  If  the  duty  of  prosecuting  offenders  were 
laid  upon  some  body,  such  as  the  American  Bankers' 
Association,  and  all  offenders,  without  exception,  were 
rigorously  prosecuted,  there  would  be  a  fair  prospect  of 
the  statements  of  condition  being,  in  most  cases,  reasonably 
correct.  It  should  be  a  penal  offence  for  the  executive  of 
a  bank  wilfully  to  make  a  material  false  statement  to 
Government,  and  a  penal  offence  also  for  a  branch  officer 
to  make  a  material  false  statement  to  the  head  office. 

PUBLICATION  OF  EARNINGS  AND  DIVIDENDS 

Finally,  it  is  to  be  desired  that  the  directors  submit  to 
the  stockholders,  and  publish  annually,  a  full  statement  of 
the  earnings  and  how  they  were  applied.  Publicity  of 
this  kind  is  clearly  in  the  interest  of  the  banks.  In  Canada 
the  good  banks  find  the  publication  of  the  regular  monthly 
statements  an  excellent  advertisement.  The  Department 
of  Finance  at  Ottawa  publishes  the  statement  of  each 
bank  in  the  supplement  to  the  official  Canada  Gazette; 
and  the  leading  financial  weeklies  reprint  the  whole, 
showing  the  gains  or  losses  made  in  deposits,  loans,  cash, 
etc.,  by  each  bank.  Signs  of  weakness  or  of  over-expan- 

209 


A    RATIONAL    BANKING    SYSTEM 

are  usually  apparent  to  the  experts  who  regularly 
analyze  the  statements.  And,  as  regards  the  application 
of  the  profits,  the  banks  pay  large  sums  every  year  to  the 
newspapers  for  printing  their  annual  reports,  which  specify 
the  amount  of  earnings,  dividends,  appropriations,  etc. 

SAFEGUARDS  FOR  THE  PUBLIC 

Thus  the  responsibility  of  the  officers,  directors,  and 
shareholders,  the  publicity  given  to  the  affairs  of  each 
bank,  restrictions  upon  the  loans  and  business,  and  the 
degree  of  control  or  supervision  exercised  by  the  Wash- 
ington Treasury  in  the  way  of  examination  (details  of 
which  are  supplied  in  the  following  chapter)  comprise  the 
chief  safeguards  for  the  protection  of  the  public.  Another 
safeguard  for  the  small  stockholders  and  the  creditors 
would  be  found  in  the  skilled  professional  who  directed 
the  bank's  daily  operations  Necessarily  the  general 
manager  would  be  a  trained  banker,  devoting  the  whole 
of  his  time  and  energies  to  the  conduct  of  the  bank.  As 
he  would  be  the  hired  servant  of  the  institution  he  need 
not  own  any  of  its  stock  at  all.  His  engagement  will  be 
a  matter  for  negotiation  between  him  and  the  board.  He 
will  work  under  a  contract  which  obligates  the  bank  to 
pay  him  a  certain  salary  for  a  fixed  number  of  years ;  and 
he  thereby  enjoys  a  measure  of  independence  of  any 
dominating  clique  which  may  exist  in  the  board.  This 
officer  will  be  a  man  with  a  national  or  world-wide  repu- 
tation, and  he  will  be  exceedingly  jealous  of  his  good  name. 
It  is  but  reasonable  to  expect  that  he  and  his  subordi- 
nates will  have  the  keenest  sense  of  their  responsibility  to 
the  bank  and  to  the  public.  Every  hour  of  every  day  the 
general  manager  will  remember  that  if  the  bank  experi- 
ences disaster  while  under  his  charge  he  probably  will  get 
the  principal  blame — for  dishonesty  or  recklessness  if  his 
own  acts  or  policies  produce  the  disaster,  and  for  criminal 
weakness  if  he  stands  by  and  allows  any  director  or  set  of 

210 


HOW   THE   CHANGE   MIGHT   BE  EFFECTED 

directors  to  damage  it  or  place  it  in  jeopardy.  Therefore, 
he  should  be  a  strong  tower  of  defence  against  the  ma- 
chinations of  evil-minded  directors.  The  whole  conduct 
of  the  bank  is  his ;  the  directors  are  merely  representatives 
of  the  body  of  stockholders.  So  long  as  they  require  him 
to  do  what  is  honest  and  proper  they  have  the  right  to 
command  him.  When  they  pass  these  bounds  and  ask 
him  or  order  him  to  break  the  laws  of  the  country,  to 
place  the  bank  in  danger  in  order  to  serve  selfish  ends  of 
their  own,  or  to  despoil  others  of  the  shareholders,  a  good 
general  manager  is  strong  enough  usually  to  defeat  them. 
He  has  his  contract  and  they  cannot  throw  him  out. 
Usually  there  will  be  on  the  board  a  strong  minority  of 
men  anxious  to  do  their  duty.  With  the  general  manager 
and  the  other  high-ranked  officers  on  their  side,  and  the 
right  clearly  with  them,  they  can  withstand  the  others. 
Especially  if  it  were  impossible  for  a  few  directors  to  buy 
up  stock  control,  could  the  general  manager  be  depended 
upon  to  check  wrongdoing  on  the  part  of  the  directors 
and  to  ensure  that  the  funds  of  the  bank  were  put  to 
proper  uses. 


XII 

INTERNAL  AND   EXTERNAL   EXAMINATION 
THE  BANK'S  OWN  INSPECTORS 

IN  the  first  chapter,  while  dealing  with  defalcations 
and  frauds,  I  intimated  that  if  they  are  to  be  stopped 
or  checked  an  efficient  system  of  internal  examination 
must  exist.  To  be  really  thorough  and  effective  bank 
examination  requires  to  be  carried  on  from  the  inside, 
systematically,  ceaselessly,  day  after  day,  week  after  week, 
by  specially  trained  men.  It  may  be  doubted  whether 
any  better  system  of  inspection  of  bank  offices  could  be 
devised  than  that  practised  by  the  leading  Canadian 
banks.  Each  bank  maintains  its  corps  of  skilled  men  se- 
lected for  their  aptitude  and  ability.  Each  branch  will 
be  visited  once,  twice,  or  three  times  in  a  year  by  a  skilled 
banker  who  has,  prior  to  each  visit,  informed  himself  as 
to  every  detail  of  its  business.  The  loans  and  discounts, 
the  cash,  securities,  the  records  of  the  deposits,  the 
methods  of  doing  business,  are  rigorously  and  painstak- 
ingly overhauled  by  a  man  who  probably  stands  higher 
in  the  bank's  service  than  does  the  manager  of  the  branch. 
The  manager  himself,  the  other  officers  and  clerks,  are 
passed  upon  by  this  competent  and  critical  visitor.  He 
gives  the  general  manager  his  opinion  as  to  the  trust- 
worthiness, the  capability  and  promise  of  each.  To  satisfy 
himself  that  everything  about  the  branch  is  right  and 
true,  and  that  the  bank's  interests  are  well  looked  after,  is 
the  object  of  his  visit.  It  can  be  said,  assuredly,  that 
when  the  inspector  of  a  Canadian  bank  makes  his  ap- 

212 


INTERNAL  AND   EXTERNAL   EXAMINATION 

pearance  at  a  branch  the  employees  do  not  tell  their 
friends  of  the  occurrence  with  a  wink  or  a  smile.  For,  if 
anything  is  wrong,  there  is  a  good  chance  that  he  will  dis- 
cover it.  And,  even  if  there  is  no  defalcation  or  wrong- 
doing to  uncover,  it  is  more  or  less  certain  that  there  will 
be  reprimands  for  loose  practices  or  breaches  of  the  rules, 
and  that  adverse  reports  regarding  certain  members  of 
the  staff  will  be  forwarded  to  head  office.  While  they 
are  not  on  their  rounds  the  inspectors  are  at  head 
office  studying  the  affairs  of  the  branches.  They  have 
access  to  all  correspondence  and  reports.  Also,  they  con- 
fer with  the  general  manager  and  the  superintendents 
of  the  various  executive  departments  regarding  branch 
matters. 

EXTERNAL  SUPERVISION  ALSO  REQUIRED 

By  means  of  this  inspection  from  within  the  Canadian 
branches  are  closely  watched.  But  the  system  of  in- 
spection has  a  weak  point:  No  external  supervision  or 
control  is  provided.  It  is  quite  possible  that  the  branches 
of  a  Canadian  bank  might  be  sound  and  clean,  while  con- 
ditions at  the  head  office  were  decidedly  bad.  That  was 
the  state  of  affairs  revealed  when  the  Ontario  Bank  failed, 
and  the  same  thing  has  been  revealed  in  other  failures. 
It  was  these  happenings  which  Mr.  J.  T.  P.  Knight,  the  sec- 
retary of  the  Canadian  Bankers'  Association,  had  in  mind 
when  he  said,  in  an  address  at  New  York  City  in  1910, 
that  the  Canadian  system  operated  efficiently  to  check 
frauds  at  the  branch  offices,  but  that  as  at  present  exist- 
ing it  sometimes  left  the  way  open  for  fraud  on  a  large 
scale  at  the  head  offices.  An  intermittent  demand  for 
Government  inspection  has  existed,  but  it  has  not  been 
inaugurated,  partly  because  of  the  difficulty  of  arranging 
a  practical  plan,  and  partly  because  the  Finance  Depart- 
ment of  the  Ottawa  government  is  reluctant  to  under- 
take the  responsibility  of  bank  examination. 

213 


A    RATIONAL    BANKING    SYSTEM 
MR.  H.  C.  McLEoo's  SCHEME  OP  EXTERNAL  AUDIT 

I  have  referred  to  the  campaign  for  external  examina- 
tion of  banks  instituted  by  Mr.  H.  C.  McLeod,  of  the 
Bank  of  Nova  Scotia.  His  plan,  as  submitted  to  the 
Canadian  Bankers'  Association  in  November,  1909,  pro- 
vided for  the  appointment  by  the  association  of  a  board 
of  auditors  to  consist  of  not  less  than  seven  full  members 
and  of  not  less  than  seven  associate  members.  To  be 
eligible  for  service  on  this  board  a  candidate  must  be  a 
member  of  "the  Canadian  Board  of  Chartered  Account- 
ants, or  of  the  Ontario  Board  of  Chartered  Accountants, 
or  of  the  Institute  of  Chartered  Accountants  for  England 
and  Wales,  or  the  Scottish  Chartered  Accountants,  or  of 
such  other  body  of  auditors  or  accountants  as  may  be 
approved  by  the  association." 

Then  for  each  bank  the  executive  of  the  association 
shall  appoint,  from  this  board,  an  auditor  or  auditors  who 
shall  "  for  that  year,  audit  the  accounts  of  the  bank,  partic- 
ularly and  carefully  with  reference  to  the  annual  state- 
ment issued  by  the  bank  to  its  shareholders.  The  auditors 
shall,  for  that  purpose,  make  an  examination  of  the  head 
office  of  the  bank,  and  shall  examine  any  of  the  branches 
if  such  examination  shall  seem  to  them  to  be  desirable." 
In  their  report  to  the  chairman  of  the  board  the  audi- 
tors shall  state 

"  (a)    Whether  in  their  judgment  the  inspection  of  the 
branches  is  regularly  and  efficiently  performed 
by  the  bank's  regular  inspectors. 
"  (b)    Whether  the  general  supervision  of  the  loans  and 

investments  appears  to  be  thorough. 
"  (c)    Whether  they  have  obtained  all  the  information 

and  explanations  they  have  required. 
"  (d)    Whether  in  their  opinion  the  balance-sheet  re- 
ferred to  in  the  report  is  properly  drawn  up  so 
as  to  exhibit  a  fair  and  conservative  view  of  the 
state  of  the  bank's  affairs." 
214 


INTERNAL  AND   EXTERNAL   EXAMINATION 

These  quotations  are  from  the  appendix  to  Mr.  McLeod's 
pamphlet  on  Bank  Inspection,  published  in  Toronto,  1909. 

As  the  Bankers'  Association  failed  to  act  on  his  sug- 
gestion, he  instituted  a  campaign  designed  to  force  the 
Ottawa  government,  through  pressure  from  public  opin- 
ion, to  inaugurate  a  system  of  external  examination. 

UNITED  STATES  BANKS  ACCUSTOMED  TO  EXTERNAL 
EXAMINATION 

If  branch  banks  were  introduced  into  the  United  States 
it  is  not  to  be  expected  that  the  banks  would  be  left  free 
from  external  supervision.  The  people  and  the  banks 
are  already  accustomed  to  governmental  examination. 
Moreover,  it  is  good  and  desirable  that  the  banking  execu-^ 
tives  should  know  that  there  is  a  power  higher  than 
themselves  watching  them  closely  all  the  time,  presum- 
ably ready  to  check  and  punish  abuses.  But  the  ma- 
chinery required  for  the  inspection  and  supervision  of 
large  branch  banking  systems  is  so  elaborate  and  special 
that  it  is  doubtful  if  the  Government  could  supply  it. 
Even  if  the  United  States  Government,  upon  the  intro- 
duction of  branch  banks,  decided  to  continue  its  present 
practice  of  examining  all  the  banking  offices  within  its 
jurisdiction,  it  is  certain  that  each  one  of  the  great  branch 
banks  would  be  obliged,  nevertheless,  to  maintain  its  own 
corps  of  skilled  inspectors.  It  would  be  compelled  to  do 
so  in  its  own  interests.  The  internal  examination  would 
be  much  more  intimate  than  the  external.  The  bank's 
own  examiners  would  cover  much  ground  which  Govern- 
ment examiners  would  not  touch.  They  would  inquire 
minutely  into  the  matters  of  increasing  the  profits  or  de- 
creasing the  expenses,  of  extending  the  facilities  and 
business,  and  they  would  devote  a  more  concentrated 
attention  to  particular  loans  and  investments  about  which 
the  executive  officers  were  perhaps  a  little  doubtful.  No 
well-conducted  branch  bank  could  do  without  an  in- 

215 


A    RATIONAL    BANKING    SYSTEM 

spection  system  of  its  own.  And  if  the  Government  con- 
tinued its  system  as  at  present,  the  same  ground  would 
be  twice  gone  over;  a  needless  duplication  of  work  and 
of  expense  would  take  place.  The  observations  and 
quotations  given  regarding  Mr.  H.  C.  McLeod's  proposed 
reform  of  the  Canadian  system  indicate  one  way  in  which 
this  duplication  of  work  might  be  avoided.  Several  other 
methods  of  supervising  and  controlling  the  bank  execu- 
tives suggest  themselves.  There  are  some  reasons  why 
it  appears  likely  that  the  people  of  the  United  States 
would  prefer  to  have  the  supervisory  powers  exercised  by 
Government  officials.  Let  us  then  outline  a  scheme  of 
internal  and  external  examination  that  appears  as  if  it 
would  offer  reasonable  guaranty  of  efficient  internal  regu- 
lation and  of  effective  supervision  from  the  outside. 

A  LARGE  DEMAND  FOR  EXAMINERS 

We  may  suppose  that  there  are  in  existence  a  number 
of  important  branch  banks,  formed  through  the  combi- 
nation of  a  large  number  of  concerns  that  were  for- 
merly independent.  These  banks  would  require  the 
services  of  many  expert  examiners  for  conducting  their 
internal  inspections.  It  would  seem  that  the  persons 
best  fitted  for  the  task  would  be  the  Government  ex- 
aminers who  had  been  operating  in  the  districts  covered 
by  the  branches.  As  an  inspector  in  the  service  of 
a  large  branch  bank  a  good  examiner  would  assuredly 
command  a  larger  salary  than  he  could  expect  while  in 
the  Government  service.  Furthermore,  if  he  demon- 
strated that  he  had  executive  ability,  he  would,  in  all 
probability,  rise  to  an  executive  position.  Thus  the  good 
men  belonging  to  the  existing  staffs  of  national  and  state 
bank  examiners  might  form  the  nucleus  of  the  inspection 
corps  of  the  banks.  They  would  get  better  positions,  and 
would  understand  what  was  required  of  them.  Acting 
under  the  orders  of  the  banking  executives,  and  always 

216 


INTERNAL   AND   EXTERNAL   EXAMINATION 

informed  beforehand  of  the  affairs  of  the  branches  visited, 
these  men,  when  assisted  by  others  employed  for  the  pur- 
pose, could  conduct  a  much  more  efficient  and  searching 
examination  than  they  can  at  present  examining  from 
the  outside.  There  would  be  occasion  for  the  employ- 
ment of  more  examiners  than  now  are  occupied  in  the 
service  of  the  Federal  and  state  governments.  That 
seems  clear  from  the  fact  that  the  examination  of  each 
banking  office  would  have  a  wider  scope  than  at  present. 
It  may  be  assumed,  reasonably  enough,  that  an  inspec- 
tion force  so  constituted  would  watch  and  supervise  the 
branch  offices  competently  and  thoroughly.  It  may  be 
assumed  also  that  it  would  do  so  in  such  a  manner  as 
eventually  to  check  very  perceptibly  the  constant  hap- 
pening of  defalcations  and  frauds  by  bankers,  which  now 
tend  so  strongly  to  lower  the  banking  business  in  the 
eyes  of  the  people.  The  next  question  is,  in  what  man- 
ner shall  the  Government  exercise  its  supervision  over 
the  executive  offices. 

How  SHOULD  GOVERNMENT  EXERCISE  ITS  SUPERVISION? 

I  acknowledge  that  there  is  room  for  much  diversity 
of  opinion  on  this  matter,  and  I  am  not  at  all  sure  that 
what  I  suggest  will  commend  itself  to  the  bankers  as  a 
whole.  In  the  first  place,  it  seems  to  me  that  a  workable 
plan  might  be  arranged  under  which  a  Government  officer 
possessing  a  knowledge  of  the  work  of  bank  examination 
and  auditing  would  be  allotted  to  each  great  branch  bank, 
or  to  two  or  more  smaller  banks.  He  should  have  free 
access  to  all  books  and  reports,  and  I  think  he  should  be 
entitled  to  admission  to  board  meetings.  He  should 
have  the  right  to  visit  and  examine  such  branches  as  he 
considers  require  investigation.  It  would  be  his  duty  to 
watch  all  the  bank's  operations  and  to  see  that  it  observes 
the  law.  Also  he  might  suggest  amendments  to  the  law 
if  he  discovered  abuses  which  were  not  covered  by  statute. 

217 


A    RATIONAL    BANKING    SYSTEM 

He  would  be  there  primarily  as  representative  of  the 
Government  for  the  protection  of  the  depositors,  cred- 
itors, and  customers.  Also  in  a  less  degree  he  would  be 
a  protector  of  the  general  body  of  stockholders  against 
the  managers  and  directors.  I  am  not  sure  whether  it 
would  too  much  exalt  this  last  mentioned  function  if  it 
were  arranged  that  half  his  salary  be  paid  by  the  Govern- 
ment and  the  other  half  by  the  bank.  If  that  were  done 
probably  the  objection  would  be  raised  that  his  dual 
capacity,  as  servant  of  the  stockholders  and  servant  of  the 
customers,  would  place  him  in  a  difficult  position  when 
action  was  necessary  in  a  case  wherein  the  interests  of 
the  stockholders  clashed  with  those  of  the  customers. 
Such  cases  might  arise  in  connection  with  the  fixing  of 
the  rate  of  interest  on  deposits  and  on  loans.  I  do  not 
think  he  should  have  the  right  to  meddle  with  the  in- 
terest rates,  unless  he  saw  a  great  wrong  being  per- 
petrated. Competition  would  regulate  the  interest  rates 
very  satisfactorily  in  my  opinion.  I  consider  that  with 
branch  banks  of  this  type  the  competition  for  deposits 
and  for  discount  accounts  would  be  even  keener  than  it 
is  at  present.  If  these  resident  auditors  or  supervisors 
belonged  to  the  right  type  the  system  of  examination, 
internal  and  external,  should  prove  more  efficient  and 
thorough  than  the  Canadian  system.  Backed  up  with 
the  measure  of  civil  and  criminal  responsibility  at  present 
placed  upon  the  directors  and  managers,  it  ought  to  ensure 
clean  and  proper  operation. 

THE  AUDIT  COMPANIES  AND  THE  BANKS 

I  am  aware  that  some  banks  in  the  United  States  now 
employ  firms  of  accountants  or  auditors,  having  an  inter- 
national reputation,  to  certify  to  the  correctness  and 
truthfulness  of  their  statements.  Some  critics  might 
suggest  that  a  regular  continuing  examination  by  these 
audit  companies  would  supply  as  much  external  super- 

218 


INTERNAL  AND   EXTERNAL   EXAMINATION 

vision  as  is  required.  In  this  connection  I  might  observe 
that  two  or  three  of  the  Canadian  branch  institutions 
employ  English  or  Scottish  auditors  to  certify  the  cor- 
rectness of  the  balance  sheets  published  with  their  annual 
reports.  Also  audits  of  this  kind  are  provided  by  prac- 
tically all  the  great  branch  banks  of  the  United  Kingdom 
and  of  Australia.  However,  it  is  doubtful  if  an  audit  of 
this  kind  would  cover  the  situation  as  it  would  exist  in 
the  United  States  if  branch  banks  were  in  vogue.  Prob- 
ably the  American  public  would  demand  a  larger  measure 
of  control  over  the  banking  institutions  than  the  audit 
companies  could  practise.  Following  are  some  of  the 
shortcomings  of  an  audit  of  the  accounts  of  a  large  branch 
bank  by  a  company  of  this  description:  In  the  first 
place,  the  audit  company's  men  do  not  conduct  an  exami- 
nation of  the  cash  and  securities  simultaneously  at  all 
the  branches.  They  merely  examine  the  holdings  of 
several  of  the  principal  branches  which  in  the  aggregate 
hold  the  bulk  of  the  cash.  They  examine  and  certify  to 
the  securities  (bonds,  stocks,  etc.) ,  held  in  the  head  office, 
and  procure  certificates  from  correspondent  and  other 
banks  as  to  the  securities  and  balances  held  by  them  for 
the  bank's  account.  In  this  way  they  are  able  to  certify 
that  the  bulk  of  the  cash  claimed  by  the  bank's  state- 
ment is  actually  there,  that  the  securities  are  practically 
intact,  and  that  the  balances  with  correspondents  are 
correctly  stated.  They  are  obliged  to  mention,  however, 
that  they  depended  on  statements  from  the  branches  for 
the  data  on  which  they  affirm  the  correctness  of  the  whole 
balance  sheet. 

It  is,  of  course,  apparent  that  the  only  way  in  which 
an  outside  examining  authority  can  satisfactorily  examine 
the  cash  and  securities  of  a  bank  with  one  hundred 
branches  is  to  have  a  man  appear  without  notice  at  the 
same  hour  on  the  same  morning  at  each  one  of  the  one 
hundred  branches  and  proceed  at  once  to  count  the  cash 
and  securities.  There  is  no  other  way  in  which  an  out- 
15  219 


A    RATIONAL    BANKING    SYSTEM 

side  examiner  can  ascertain  with  exactness  that  the 
bank's  cash  and  securities  are  actually  there  on  a  given 
date.  It  is  easy  to  see  that  this  would  be  a  costly  process, 
and  in  all  probability  it  would  prove  impracticable. 

AN  EXPERT  VALUATION  OF  COMMERCIAL  LOANS 

Another  objection  is  that  the  audit  companies  are 
called  in  by  the  bank,  which  is  presumably  prepared  for 
the  inspection  when  it  comes.  There  is  no  surprise  about 
it.  The  bank  is  not  taken  unawares,  as  should  be  the 
case.  Usually  they  have  their  windows  dressed  for  the 
occasion. 

Also  the  executive  of  the  bank  selects  the  audit  com- 
pany and  pays  the  fee.  In  engaging  an  audit  company  it 
thus  appears  in  the  role  of  a  dispenser  of  patronage;  and 
though  there  are  a  number  of  houses  of  such  high  standing 
and  reputation  that  a  bill  of  health  from  them  might  be 
taken  as  conclusive  enough,  still  the  fact  remains  that 
there  are  other  houses  anxious  to  be  employed  and  which 
would,  perhaps,  be  not  overanxious  to  offend  the  power- 
ful banking  parties  who  employed  them  and  paid  them. 

It  might  be  objected,  further,  that  an  audit  company 
would  hardly  be  qualified  to  pass  on  the  value  of  the 
commercial  loans  and  discounts,  at  a  hundred  or  more 
branches,  which  would  comprise  probably  the  largest  part 
of  the  assets  claimed  by  the  bank's  balance  sheet.  To 
value  these  loans  an  intimate  knowledge  of  local  condi- 
tions at  a  hundred  or  more  points  would  be  required,  and 
a  knowledge  of  the  circumstances  and  prospects  of  thou- 
sands of  borrowing  customers,  many  of  whom  would  not 
appear  at  all  in  the  commercial  agency  reference  books. 
Often  enough  the  general  manager  himself  will  not  know 
what  value  should  be  placed  on  a  large  loan  or  liability  ac- 
count which  has  been  carried  by  the  bank  for  years  and 
which  he  has  studied  most  carefully  from  the  beginning. 
When  this  is  so  it  is  scarcely  to  be  expected  that  an  out- 

220 


INTERNAL  AND   EXTERNAL   EXAMINATION 

sider  can  come  into  the  bank  and  say  whether  or  not  its 
loans  and  discounts  are  worth  the  figure  at  which  they  are 
carried  on  the  books.  To  merely  count  up  the  totals  of 
the  discounted  notes  on  hand  would  be  utterly  valueless. 
In  some  cases,  to  have  a  correct  valuation  of  the  loans  and 
discounts  would  be  more  to  the  point,  in  judging  a 
bank's  solvency,  than  to  know  that  its  cash  and  securities 
were  intact.  Under  an  efficient  system  of  clearing-house 
examinations,  such  as  Chicago  and  other  cities  recently 
instituted,  the  clearing-house  examiner  can  arrive  at  a 
fairly  satisfactory  notion  as  to  the  value  of  the  loans  and 
discounts  carried  by  a  bank  inspected  by  him;  but  as 
observed  in  an  earlier  chapter,  there  are  limitations  to  his 
power,  and,  while  a  system  of  clearing-house  examinations 
may  perform  excellent  work  in  the  large  cities,  it  is  not 
easy  to  see  how  it  could  be  extended  to  the  country 
districts. 

EXAMINATION  OF  THE  BRANCHES 

In  view  of  these  difficulties  it  seems  clear  that  the  re- 
sponsibility for  inspecting  and  examining  the  branches 
should  be  placed  upon  the  banks  themselves.  If  the 
directors  and  management  were  made  responsible  for  the 
truthfulness  of  the  reports  issued  by  the  bank  they  would 
use  their  best  efforts  to  inaugurate  an  efficient  system  of 
internal  checking  and  examination,  and  to  ensure  that 
the  returns  from  the  branches  were  reliable  and  truthful. 
I  have  already  suggested  that  governmental  supervision 
of  the  head  offices  would  have  an  important  effect  in 
keeping  the  executives  in  order.  It  is  worth  while,  also, 
to  discuss  the  advisability  of  giving  the  supervisory  power 
to  the  American  Bankers'  Association  instead  of  to  the 
Government.  If  the  number  of  banks  were  reduced  to 
two  hundred,  or  thereabout,  each  bank  having  a  long  list 
of  branches,  the  American  Bankers'  Association  would  be 
a  more  powerful  body  than  it  is  to-day.  At  present  it  is 
too  large  and  unwieldy.  When  important  questions  come 

221 


A    RATIONAL    BANKING    SYSTEM 

up  affecting  the  interests  of  the  bankers  it  is  often  the 
case  that  there  is  a  great  division  of  opinion  as  to  the 
course  the  association  should  take;  and  whatever  course 
is  adopted  there  may  be  an  influential  minority,  com- 
prising the  representatives  of  thousands  of  institutions, 
which  is  strongly  against  it.  Thus  the  influence  of  the 
association  is  lessened;  its  voice  is  not  always  the  solid 
united  voice  of  the  banking  interests  of  the  country.  But 
reduce  the  number  of  units  to  one-fiftieth  or  one-sixtieth 
of  the  present  figure,  and  a  different  kind  of  body  will  be 
in  evidence.  The  representatives  of  two  hundred  large 
branch  banks,  even  if  they  are  animated  by  a  strong  sec- 
tional feeling,  will  reach  agreement  quickly  and  with 
facility  while  the  representatives  of  several  thousand 
small  banks  were,  perhaps,  arguing  interminably. 

SUPERVISION  BY  AMERICAN  BANKERS'  ASSOCIATION 

It  would  be  possible  for  an  associated  body  of  this  de- 
scription to  devise  a  very  thorough  and  satisfactory 
system  of  supervision  of  the  executives  of  the  various 
banks.  The  association  would  be  more  likely  than  the 
Government  to  appoint  capable  men  for  the  work.  And 
there  would  be  another  advantage:  If  the  business  of 
supervising  and  examining  the  banks  devolved  upon  the 
American  Bankers'  Association,  there  would  go  with  it 
a  measure  of  responsibility  for  bank  failures.  No  reason- 
able person  thinks  of  holding  the  Comptroller  of  the  Cur- 
rency, or  his  examiners,  responsible  for  the  failure  of  a 
national  bank  under  the  present  system.  But  if  the 
banks  were  branch  banks,  and  the  American  Bankers' 
Association  had  the  duty  of  examining  them,  the  people 
would  expect  the  association  to  protect  them,  and  the 
representative  bankers  comprising  the  association  would 
feel  a  stronger  obligation  to  do  so.  It  is  probable  that 
the  united  banks  would  care  for  the  depositors  and  credit- 
ors of  a  crippled  institution,  in  those  cases  where  it  could 

222 


INTERNAL  AND   EXTERNAL   EXAMINATION 

be  done  with  reasonable  safety,  in  much  the  same  manner 
as  the  Bank  of  England  and  the  other  British  joint- 
stock  banks  cared  for  the  Baring  creditors  in  1890,  and 
as  the  associated  Canadian  banks  cared  for  the  Ontario 
Bank  creditors  in  1906,  and  the  Sovereign  Bank  creditors 
in  1908.  It  should  be  mentioned  that  where  the  branch 
system  prevails  the  banks  are  very  apt  to  take  that 
course  for  their  own  protection,  even  when  the  associated 
bankers  have  no  powers  of  examination.  If  the  associa- 
tions of  bankers  were  given,  and  were  willing  to  accept, 
powers  of  examination  and  supervision,  it  would  make 
them  more  ready  to  protect  banking  creditors.  Of  course 
it  could  not  be  assumed  that  they  would  do  so  in  every 
case,  as  it  might  happen  that  the  crippled  bank's  affairs 
were  in  such  bad  shape  that  nothing  could  be  done  for 
the  creditors. 

However,  no  matter  how  efficient  and  satisfactory  such 
a  system  of  supervision  by  the  association  might  prom- 
ise to  be,  it  is  possible  that  public  opinion  throughout  the 
country  would  be  hostile  to  the  idea  of  conferring  this 
power  upon  a  centralized  association  of  bankers.  It  is 
also  possible  that  the  bankers  would  not  be  willing  to 
accept  the  responsibility.  And  if  the  majority  were  will- 
ing, some  of  the  individual  bankers  might  be  strongly 
opposed  to  it  for  very  proper  reasons.  (They  might  fear 
that  their  strong  competitors  would  learn  too  much  about 
their  business  and  take  deposits  or  valuable  discount 
accounts  from  them.)  So  it  is  likely  that  the  only  way 
in  which  all  parties  could  be  satisfied  would  be  through 
continuing  the  Government  in  its  power  of  supervision. 

VISITATION  OF  BANKS  BY  THE  COMPTROLLER 

Yet  another  plan  suggests  itself.  It,  however,  would 
not  be  so  thorough  as  those  already  outlined.  Instead 
of  appointing  resident  inspectors  or  examiners  for  the 
various  banks,  the  Comptroller  of  the  Currency  might  be 

223 


A    RATIONAL    BANKING    SYSTEM 

given  the  power  to  visit  (by  deputy)  the  head  offices  and 
branches.  Relying  upon  the  responsibility  placed  by 
law  upon  the  bank  directors  and  managements  the  Gov- 
ernment might  forego  the  regular  inspection  of  the  banks, 
and  call  for  frequent  regular  statements.  In  this  case 
it  would  be  understood  that  complaints  against  the  banks 
might  be  directed  to  the  Treasury  Department  at  Wash- 
ington. When  it  appeared  that  any  of  the  banks  were 
not  properly  performing  their  functions,  or  that  they 
were  outraging  decency  or  the  law,  the  Comptroller  might 
investigate  and  punish.  Under  this  plan  the  watch  kept 
by  the  Government  upon  the  banks  would  not  be  as  close 
as  if  it  maintained  examiners  or  auditors  at  the  head 
offices.  However,  it  should  be  borne  in  mind  that  the 
other  plan — of  appointing  resident  auditors — might  prove 
impracticable,  or  it  might  not  work  satisfactorily.  A 
resident  examiner  might  be  corrupted;  and  if  he  were 
his  presence  at  the  bank  would  be  worse  than  useless. 
He  might  be  too  officious,  and  interfere  seriously  with  the 
proper  working  of  the  bank.  He  might  learn  all  about 
the  business  of  one  bank  and  then  betray  it  to  a  com- 
petitor. Other  contingencies  suggest  themselves.  In 
connection  with  any  and  all  of  these  schemes  it  is  to  be 
remembered  that  no  system  of  examination  should  be 
taken  as  positively  insuring  banks  against  insolvency 
or  bank  creditors  against  loss.  Mr.  J.  B.  Forgan  ex- 
pressed this  very  forcibly  in  his  address  at  Chicago,  from 
which  I  have  already  quoted:  "The  public  must  not  be 
deluded  into  the  belief  that  official  examinations  will  re- 
lieve them  of  the  fundamental  duty  of  exercising  their 
own  discrimination  in  the  selection  of  a  bank.  The  en- 
tire credit  system  on  which  the  business  of  the  country 
is  built  up  having  its  very  basis  in  the  exercise  of  such 
discrimination,  any  delusion  which  proposes  to  relieve 
the  public  of  it  would,  morally  and  economically,  be 
most  injurious,  tending  to  carelessness  and  general  de- 
moralization in  business  affairs  as  well  as  to  a  lowering 

224 


i 


INTERNAL   AND    EXTERNAL   EXAMINATION 

of   the    standard    of   business    sagacity  and    social    effi- 
ciency." 

UNIFORMITY  OF  BANKING  LAWS 

Needless  to  say,  it  is  advisable  that  the  laws  relating 
to  bank  examination  and  governmental  supervision  should 
be  of  uniform  character.  The  institution  of  branch  bank- 
ing of  the  type  referred  to  in  this  book  would  be  apt  to 
bring  about  a  transfer  of  the  control  over  banking  from 
the  states  to  the  Federal  authorities.  One  of  the  main 
factors  operating  to  induce  the  small  independent  banks 
to  change  themselves  into  branches  would  be  the  desire 
to  acquire  privileges  of  note  issue.  The  Federal  govern- 
ment is  the  only  power  authorized  to  confer  that  privilege. 
So  the  note-issuing  branch  banks  would  require  Federal 
charters.  If  it  be  assumed  that  in  the  course  of  time 
most  of  the  banks  in  the  country  were  converted  into 
branch  banks,  it  would  follow  that  the  state  governments 
would  eventually  find  themselves  with  scarcely  any  banks 
of  their  own  creation  to  control.  In  each  state  the  bulk 
of  the  business  would  be  in  the  hands  of  banks  possessing 
Federal  charters.  Thus  it  would  be  possible,  in  that 
way,  to  bring  the  laws  governing  banking  into  uniformity. 
Congress  could  then  enact  a  general  bank  act  which  would 
apply  to  practically  all  the  banks  in  the  country;  and 
the  state  governments  would  have  no  more  control  over 
the  branch  banks  than  they  now  have  over  the  national 
banks.  For  a  considerable  time  after  the  change  went 
into  effect  each  state  might  have  a  number  of  small 
banks  of  the  single-office  type,  created  by  and  subject  to 
the  jurisdiction  of  the  state  government.  Besides  con- 
trolling these  the  different  state  governments  would, 
perhaps,  have  power  to  tax  the  branch  banks  for  the 
offices  maintained  in  their  respective  territories.  As 
they  now  have  no  power  to  examine  the  national  banks, 
it  is  not  to  be  supposed  that  they  would  have  power  to 
examine  branch  banks  having  Federal  charters. 

225 


A    RATIONAL    BANKING    SYSTEM 
A  LARGE  MEASURE  OF  FREEDOM 

At  the  outset,  when  the  branch  banks  were  to  be  in- 
augurated, there  would  infallibly  be  conferences  between 
the  bankers  who  intended  to  convert  their  businesses 
into  branch  banks  and  the  Government  officials  regard- 
ing the  extent  and  nature  of  the  supervisory  powers  to 
be  exercised  by  Government.  Naturally  the  bankers 
would  wish  to  have  the  governmental  interference  re- 
duced to  a  minimum.  And  it  would  be  wise  policy  on  the 
part  of  the  Government  to  endeavor  to  devise  a  plan  that 
would  ensure  a  reasonable  degree  of  safety  for  bank 
creditors,  while  leaving  the  banks  reasonably  free  from 
official  interference.  It  is  one  of  the  weighty  arguments 
against  the  present  banking  system  that  it  is  necessary 
to  surround  all  banks  with  vexatious  and  sometimes  un- 
reasonable restrictions  because  some  of  the  badly  managed 
institutions  abuse  their  privileges.  When  there  are  too 
many  legal  restrictions  of  this  kind  the  effect  is  to  di- 
minish materially  the  usefulness  of  the  banks;  and  the 
restrictions  do  not,  in  all  cases,  prevent  the  abuses. 

The  happiest  state  of  affairs  imaginable  would  be  that 
in  which  the  banks,  without  being  supervised  or  con- 
trolled, administered  their  affairs  wisely  and  beneficently, 
extending  a  judicious  support  to  all  worthy  forms  of  in- 
dustry, and  maintaining  undisputed  strength  and  sol- 
vency. If  a  large  measure  of  responsibility  were  thrown 
upon  the  parties  administering  the  several  banks,  if  they 
were  given  to  understand  that  as  a  trial  the  Government 
would  leave  them  with  a  considerable  measure  of  free- 
dom, and  that  restrictions  and  provisions  for  closer 
examination  would  be  introduced  only  on  proof  being 
supplied  that  the  banks,  or  some  of  them,  were  abusing 
their  privileges  and  their  freedom,  the  chances  are  that 
the  best  banks  would  do  all  in  their  power  to  ensure 
good  and  clean  practice. 

If  the  banks  had  to  appear  before  Congress  in  a  body, 

226 


INTERNAL  AND  EXTERNAL  EXAMINATION 

every  ten  or  twelve  years,  for  a  renewal  of  their  charters, 
as  is  the  case  in  Canada,  the  fact  would  operate  as  a 
wholesome  restraint  upon  them  in  the  bet  ween  whiles. 

A  DEFINITION  OP  A  BAD  DEBT 

Before  closing  this  chapter  I  wish  to  refer  to  certain 
rules  which  govern  the  work  of  examination  of  national 
banks  as  presently  conducted.  I  have  already  drawn 
freely  upon  the  published  utterances  of  Mr.  J.  B.  Forgan, 
the  eminent  Chicago  banker,  in  order  to  illumine  certain 
of  the  points  discussed  in  this  book.  I  now  have  occasion 
to  draw  again  upon  the  same  excellent  authority.  In  his 
Chicago  address  (American  Bankers'  Association,  1909) 
Mr.  Forgan  mentions  that  the  clause  in  the  National 
Bank  Act  which  stipulates  that  no  obligation  due  a 
bank  can  be  considered  bad  until  interest  is  past  due 
six  months,  and  not  then  if  it  is  secured  or  in  process  of 
collection,  operates  to  keep  insolvent  banks  afloat — 
through  enabling  them  to  preserve  the  appearance  of 
solvency.  Also  he  points  out  that  the  Comptroller  i 
hampered  by  the  Federal  courts'  definition  of  insolvency, 
which  is  "inability  to  pay  current  debts  as  they  mature," 
and  he  could  be  enjoined  in  the  District  Court  for  any 
abusive  exercise  of  his  discretion.  Owing  to  the  effects 
of  these  laws  it  is  to  be  supposed  that  there  are  now,  and 
always,  a  considerable  number  of  really  insolvent  banks 
masquerading  as  good  institutions  and  inviting  the  peo- 
ple to  entrust  them  with  deposits.  Mr.  Forgan  says  that 
even  the  Chicago  Clearing-House  Association  has  a  natural 
hesitancy  to  take  action  that  will  result  in  closing  a  weak 
bank.  "Conditions  must  become  very  bad  and  expostu- 
lation be  exhausted  before  any  supervisory  authority, 
however  constituted,  will  assume  the  responsibility  of 
action  that  will  lead  to  the  closing  of  a  bank's  doors.  If 
it  were  otherwise,  and  such  action  were  taken  simply 
because  something  in  the  bank  was  unsatisfactory,  such 

227 


A    RATIONAL    BANKING    SYSTEM 

authority  would  be  accused  of  shutting  up  a  solvent  in- 
stitution, not  merely  by  its  stockholders,  but  by  its  de- 
positors themselves,  in  whose  behalf  the  action  would  be 
taken." 

WEAK  BANKS 

Thus  it  can  be  seen  that  there  is  every  probability  that 
under  the  existing  system  there  will  be  all  the  time  in  busi- 
ness, parading  with  the  good  banks  and  not  to  be  dis- 
tinguished from  them,  many  weak  and  struggling  con- 
cerns practically  insolvent,  and  nobody  or  no  authority 
willing  to  take  the  responsibility  of  closing  them. 

And,  with  regard  to  weak  banks,  I  admit  that  in  one 
sense  it  is  laudable  to  nurse  them  along  slowly  and  pain- 
fully toward  solvency  or  strength.  But  I  think  most  of 
my  readers  who  have  a  knowledge  of  banking  will  agree 
with  the  Wall  Street  Journal  in  its  editorial  remarks  on 
that  subject,  in  the  issue  of  July  20,  1909 :  "A  weak  bank 
in  the  financial  system  of  any  state  has  no  more  right  to 
continue  in  business  than  has  a  weak  bridge  in  a  public 
highway.  The  duty  of  the  public  authorities  and  of  pub- 
lic opinion  in  the  one  case  is  the  same  as  in  the  other. 
Once  an  element  of  weakness  has  developed,  the  defect 
in  the  structure  is  to  be  remedied  without  delay,  so  as  to 
make  it  capable  of  bearing  the  full  weight  of  its  proper 
burden,  or  the  thing  should  be  closed  up.  The  weak  bank 
takes  away  legitimate  business  from  the  bank  that  is  safe, 
and  does  injury  to  the  business  as  a  whole  by  spreading 
general  distrust.  It  should,  therefore,  be  put  out  of  exist- 
ence with  no  less  expedition  than  we  put  out  a  fire  or 
block  up  a  highway  or  suspend  traffic  on  a  tumbled-down 
bridge. 

"This  is  not  a  case  in  which  sentiment,  social  standing 
of  officials,  or  hesitation  to  sacrifice  an  old  institution  that 
has  outlived  its  usefulness  can  be  considered.  If  a  bank 
is  weak  it  has  either  got  to  strengthen  itself  or  go.  The 
machinery  of  the  law  cannot  be  invoked  too  speedily." 

228 


INTERNAL  AND  EXTERNAL   EXAMINATION 
A  SCIENTIFIC  CLASSIFICATION  OF  ASSETS 

One  of  the  principal  objects  to  be  achieved  by  the  su- 
pervisory authorities  would  be  the  institution  of  proper 
methods  of  bookkeeping,  of  internal  inspection  and  regu- 
lation, and  of  handling  the  loans  and  discounts.  It  is  a 
matter  of  grave  importance  that  the  administration  of 
the  loans  and  discounts  be  of  an  intelligent  and  scientific 
character.  I  have  to  thank  Mr.  Forgan  once  more  for  a 
description  of  the  manner  in  which  the  best  banks  in 
Chicago  classify  their  loans.  At  Chicago,  in  advising 
bank  directors  to  have  a  periodical  classification,  by 
others  than  the  executive  officers,  of  their  banks'  loans, 
he  explains:  " It  may  be  done  by  a  committee  of  directors 
or  by  a  competent  auditor,  at  whose  disposal  must  be 
placed  the  statements  of  customers  and  all  the  informa- 
tion available  in  the  credit  department.  The  assets  can 
be  divided  into  five  classes,  and  the  result  will,  I  think, 
disclose  to  the  directors  the  necessity  for  a  contingent 
fund  such  as  I  have  advocated.  The  percentage  of  each 
class  to  the  aggregate  total  should  be  shown  and  the 
periodical  classifications  compared  with  each  other.  This 
will  disclose  the  progressive  condition  of  the  assets, 
whether  they  are  growing  better  or  worse,  and  from  the 
result  the  management  may  be  judged.  I  suggest  the 
following  classification : 

"i.  Good,  desirable  business. 

"2.  Fair  business  risks. 

"3.  Business  not  desirable  as  a  new  proposition,  but 
which  policy  makes  it  necessary  to  carry  along  for  the 
purpose  of  gradual  liquidation. 

"4.  Loans  which  should  be  liquidated,  and  on  which 
more  or  less  loss  is  probable. 

"5.  Loans  so  bad  that  they  should  be  charged  off  now. 

"The  respective  percentage  of  these  five  categories 
forms  a  very  good  criterion  of  the  character  of  a  bank's 
management.  It  must  be  the  constant  and  unremitting 

229 


A    RATIONAL    BANKING    SYSTEM 

aim  of  its  officers  to  reduce  class  3  to  its  smallest  possible 
proportion  and  to  eliminate  entirely  the  4th  and  5th 
classes." 

Now,  what  a  remarkable  uplifting  of  the  standard  of 
banking  there  would  be  in  the  United  States  if  those 
highly  trained  and  experienced  gentlemen,  in  Chicago  and 
other  cities,  who  practise  such  excellent  methods  in  their 
own  institutions,  might  have  the  authority  to  impose 
those  methods  upon  the  thousands  of  banking  offices 
throughout  the  country!  They  might  do  so  under  the 
branch  system.  It  is  hopeless  to  expect  material  progress 
in  that  direction  under  the  system  now  existing. 


XIII 

A  FIXED   LEGAL  RESERVE 
How  THE  RESERVE  LAW  WORKS 

F  HAVE  remarked,  in  foregoing  chapters,  that  the  in- 
1  troduction  of  branch  banks  would  simplify  the  cur- 
rency question  through  making  note  issues  based  on 
general  banking  assets  more  practicable.  Also  it  has 
been  explained  that  the  branch  banks  would  abolish 
certain  serious  troubles  connected  with  the  cash  reserves. 
It  can  be  said  that  the  change  would  have  an  important 
bearing  upon  the  matter  of  the  fixed  legal  reserve.  That 
question,  too,  would  be  simplified.  At  present  the  na- 
tional banks  in  the  first-class  reserve  centres  are  required 
by  law  to  maintain  a  25  per  cent,  reserve  of  specie  and 
legal  tenders,  while  the  reserve  requirement  for  country 
banks,  comprised  of  specie,  legals,  and  balances  with  ap- 
proved reserve  agents,  is  fixed  at  15  per  cent.  Another 
Chicago  banker,  Mr.  David  R.  Forgan,  president  of  the 
National  City  Bank,  gave  to  the  New  York  State  Bankers' 
Association  (January,  1908)  a  lucid  explanation  as  to  the 
manner  in  which  the  present  reserve  law  works.  He  said : 
"The  way  the  law  regarding  reserves  works  is  best  under- 
stood by  an  illustration.  The  law  requires  a  national 
bank  in  Troy,  New  York,  to  carry  15  per  cent,  reserve. 
Only  6  per  cent.,  however,  need  be  in  its  own  vault.  The 
other  9  per  cent,  may  be  with  its  reserve  agent  in  New 
York  City.  If  the  deposits  of  the  Troy  bank  are  $1,000,- 
ooo  it  keeps  $60,000  at  home  and  $90,000  in  New  York. 
The  $90,000  in  New  York,  however,  is  not  money.  It  is 

231 


A    RATIONAL    BANKING    SYSTEM 

merely  a  credit  on  the  books  of  the  New  York  bank  against 
which  a  reserve  (allowing  for  legal  deductions)  of  not  more 
than  $20,000  is  kept  by  the  New  York  bank.  When  the 
Troy  bank,  becoming  alarmed,  deems  it  prudent  to  have 
a  larger  proportion  of  its  reserve  at  home,  it  telegraphs 
the  New  York  correspondent  to  send  it,  say,  $20,000. 
That  does  not  seem  like  an  unreasonable  request  to  the 
Troy  banker — only  $20,000  out  of  $90,000. 

"But  when  the  Troy  bank  withdraws  $20,000  it  with- 
draws all  the  reserve  there  is  in  the  world  against  its  de- 
posits, except  what  is  in  its  own  safe,  and  the  New  York 
bank  is  left  with  a  credit  on  its  books  of  $70,000,  against 
which  no  reserve  now  exists.  When  the  transaction  is 
multiplied  by  thousands  and  becomes  general,  it  is  simply 
an  impossibility  for  the  New  York  banks  to  stand  it." 

DIFFERENCES  IN  RESERVE  REQUIREMENTS 

Though  it  is  recognized  everywhere  that  a  bank  trans- 
acting business  on  moneys  derived  from  depositors,  re- 
payable on  demand  or  at  short  notice,  should  always  have 
a  reserve  fund  of  cash  and  surely  available  assets,  it  is  a 
most  difficult,  if  not  an  impossible,  task  to  prescribe  the 
percentage  of  reserve  that  should  be  held  by  the  individual 
institutions  in  any  country  or  state.  No  greater  mistake 
can  be  made  than  to  assume  that  some  figure  arbitrarily 
chosen  will  fit  the  circumstances  of  all  the  banks.  Every 
banker  of  experience  knows  that  the  minimum  reserve 
necessary  for  different  banks  will  vary  greatly.  A  25  per 
cent,  reserve  might  be  ample  or  too  large  for  one  institu- 
tion, while  50  per  cent,  would  not  be  a  whit  too  much  for 
another  differently  circumstanced.  Practical  bankers  are 
aware,  also,  that  the  percentage  of  reserve  that  should  be 
carried  by  any  particular  bank  will  vary  with  the  different 
seasons  of  the  same  year.  In  one  season  a  small  reserve 
will  be  quite  safe  and  proper,  while  in  another  it  may  be 
that  double  the  proportion  will  be  necessary. 

232 


A    FIXED    LEGAL    RESERVE 

At  the  Denver  Convention  of  the  American  Bankers' 
Association  in  1908  Mr.  Byron  E.  Walker,  the  president 
of  the  Canadian  Bank  of  Commerce  (now  Sir  Edmund 
Walker) ,  remarked  as  follows  about  this  matter  of  reserves : 
' '  The  real  reserve  requirements  of  any  particular  bankdiff  er 
from  those  of  other  banks  in  accordance  with  the  nature  of 
its  obligations  as  compared  with  theirs.  It  is  conceivable 
that  the  ideal  point  at  which  cash  reserves  should  be  kept 
would  be  different  in  the  case  of  any  ten  or  twenty  banks 
which  you  might  select  for  comparison,  even  in  the  same 
city  or  community.  The  bank  which  acts  as  banker  for 
other  banks  needs  very  large  reserves  indeed.  A  bank  in 
the  same  city  doing  mainly  the  business  of  manufac- 
turers, merchants,  exporters,  etc.,  will  need  altogether 
smaller  reserves,  and  a  bank  gathering  the  savings  of  a 
quiet  country  community  needs  much  less  again." 

WHEN  THE  LAW  FIXES  No  MINIMUM 

In  order  to  make  it  clear  how  the  trained  banker  handles 
his  reserves  when  left  free  to  use  his  own  judgment,  I 
shall  in  this  chapter  resort  again  to  the  Canadian  practice 
for  illustration.  The  law  of  Canada  does  not  prescribe  a 
percentage  below  which  the  cash  reserves  of  the  bank 
shall  not  fall.  This  is  not  the  result  of  accident  or  care- 
less omission,  but  is  the  outcome  of  much  discussion 
and  much  deliberation  on  the  part  of  the  cabinet  ministers 
and  the  leading  bankers.  There  has  always  been  a  small 
body  of  opinion  holding  that  a  legal  minimum  of  cash 
reserve  should  be  fixed  for  the  banks  in  Canada,  as  it  is 
for  the  banks  in  the  United  States.  But  the  Government 
has  hitherto  agreed  with  the  banking  theory,  that  while 
the  existence  of  so  many  small  institutions  in  the  United 
States  necessitated  a  certain  measure  of  governmental 
regulation  of  cash  reserves,  the  conditions  in  Canada  are 
not  such  as  to  call  for  legislation  on  the  point. 

The  great  joint-stock  banks  in  England  are  not  sub- 

233 


A    RATIONAL    BANKING    SYSTEM 

jected  to  a  minimum  reserve  law.  And  if  the  United 
States  had  branch  banks  it  is  altogether  likely  that  Con- 
gress would  endeavor  in  another  way  to  ensure  sound 
and  safe  banking  practice.  When  the  policy  is  followed 
of  naming  some  percentage  or  proportion  of  the  liabilities 
as  the  legal  minimum  of  reserve — to  be  maintained  at  all 
times — the  effect  is  to  lock  up  or  render  unavailable  just 
that  much  of  the  banking  resources  of  the  country.  If 
the  minimum  requirement  is  fixed  low  enough  so  as  to  do 
no  damage  through  lock-up,  it  will  be  useless  as  a  device 
for  ensuring  that  the  banks  lend  but  a  safe  proportion  of 
their  funds.  And  if  it  is  fixed  high  enough  to  ensure  that 
no  banks  shall  carry  too  much  sail,  it  must  perforce  result 
in  a  woeful  and  wholly  unnecessary  curtailment  of  the 
power  of  the  banks  to  aid  industry,  commerce,  and 
agriculture. 

THE  LEGAL  RESERVE  AND  THE  REAL  RESERVE 

As  an  example  take  the  case  of  the  New  York  City 
banks,  which  are  compelled  by  statute  to  maintain  a 
minimum  reserve  of  25  per  cent,  in  specie  and  legals. 
The  effect  of  that  stipulation  is  to  make  it  necessary  for 
those  banks  to  carry  in  practice  a  potential  reserve  rang- 
ing all  the  way  from  25  per  cent,  to  perhaps  60  per  cent, 
or  more.  The  25  per  cent,  of  cash  is  what  they  may  not 
use  or  touch;  it  must  be  kept  there  for  show  purposes, 
supposedly  as  an  advertisement  or  indication  of  solidity. 
As  a  matter  of  fact,  every  one  of  those  banks  is  obliged 
to  maintain  a  reserve  entirely  independent  of  the  legal 
reserve;  every  one  must  at  times  prepare  special  funds 
which  shall  be  available  for  meeting  some  anticipated 
withdrawals  of  deposits,  or  a  series  of  loans  which  the 
bank  is  under  obligation  to  make  to  its  customers.  A 
real  reserve  must  be  more  than  a  mere  show  thing;  it 
must  receive  surplus  funds  and  yield  them  up  again.  The 
real  reserve  of  the  New  York  banks  consists  of  specie  and 

234 


A    FIXED    LEGAL    RESERVE 

legals  only  in  part.  That  reported  as  reserve  in  the  week- 
ly statement  is  only  a  part  of  the  real  reserve.  The  rest 
of  it  consists  of  balances  in  the  international  banks,  bills 
of  exchange,  call  loans  to  stock-brokers,  and  some  high- 
class  securities.  These  items  are  not  disclosed,  but  they 
nevertheless  comprise  a  very  important  part  of  the  real 
reserve.  The  amount  so  kept  will  run  up  and  down  ac- 
cording to  the  varying  circumstances  of  the  banks.  Any 
one  who  attempts  to  judge  the  strength  of  the  banks 
solely  by  their  holding  of  specie  and  legals  will  make  a 
capital  mistake. 

THE  BANK  OF  MONTREAL'S  SECONDARY  RESERVE 

In  speaking  of  the  reserve  of  the  Bank  of  Montreal, 
Dr.  Joseph  French  Johnson,  whom  I  have  already  quoted, 
told  the  Missouri  Bankers'  Convention  (1909)  that  in 
specie  and  legals  the  bank  carried  only  about  12^  per  cent, 
of  its  liabilities.  But  any  one  who  supposed,  from  that 
circumstance,  that  the  Bank  of  Montreal  was  not  strong 
would  be  entirely  wrong.  The  specie  and  legals  usually 
comprise  less  than  one-third  of  its  real  reserve.  Call  the 
specie  and  legals  the  primary  reserve  if  you  like,  but  the 
secondary  reserve  is  the  account  which  is  really  depended 
upon  for  emergencies.  It  is  composed  of  balances  in  the 
international  banks,  call  loans  in  New  York  and  London, 
and  first-class  securities  available  for  marketing  or  as  a 
basis  for  advances  in  the  world  centres.  There  are  one 
or  two  features  about  the  call  loans  of  the  Canadian  banks 
in  New  York  which  make  them  more  available  and  better 
reserves  than  the  call  loans  of  the  New  York  banks  made 
in  New  York.  In  the  address  just  referred  to  Doctor 
Johnson  is  said  to  have  remarked  about  the  secondary 
reserve  of  the  Bank  of  Montreal,  which  consists  chiefly 
of  call  loans  in  New  York  and  London:  "Now,  the  time 
will  come  when  they  will  find  that  secondary  reserve  a 
disappointment  in  my  opinion.  But  at  the  present  time 

16  235 


A    RATIONAL    BANKING    SYSTEM 

call  loans  are  a  source  of  more  strength  to  the  Canadian 
banks  than  they  are  to  our  New  York  banks.  Our  New 
York  banks  rely  upon  them,  as  you  gentlemen  know, 
unduly,  and  when  the  pinch  comes  they  cannot  get  the 
money  New  York  owes  them." 

THE  NEW  YORK  CALL  LOANS 

One  reason  the  call  loans  are  a  source  of  more  strength 
to  the  Canadian  banks  is  that  only  one  object  is  kept  in 
view  when  the  funds  are  put  out:  It  is  to  have  the 
money  immediately  available  under  practically  all  cir- 
cumstances. The  agents  and  managers,  in  New  York, 
of  the  Canadian  banks  are  not  connected,  directly  or 
indirectly,  with  any  of  the  stock  market  cliques  or  parties ; 
they  are  merely  the  hired  professional  servants  of  in- 
stitutions which  have  a  proud  record  of  fifty  years  and 
more  of  uninterruptedly  meeting  in  cash  all  lawful  de- 
mands, and  both  they  themselves  and  their  superiors  in 
the  executive  offices  in  Canada  are  governed  in  making 
the  loans  by  the  determination  to  have  them  unfailingly 
available  at  call.  Thus  they  do  not  let  their  funds  go 
freely  for  the  purpose  of  making  a  better  market  for 
stocks  in  which  they  are  interested;  nor  do  they,  in  any 
other  manner,  subordinate  the  interests  of  the  bank  to 
those  of  parties  or  individuals.  The  consequence  is  that 
the  loans  are  made  only  to  parties  who  they  know  will 
respond  at  once  to  calls,  and  strictly  on  securities  which 
can  be  sold  in  almost  any  kind  of  a  market,  a  full  20  per 
cent,  margin  being  required  in  every  case.  The  rates  of 
interest  they  get  are  a  secondary  consideration;  the  first 
is  immediate  convertibility.  It  therefore  develops  in 
practice  that  lists  of  their  borrowers  are  composed  of 
names  of  the  foremost  financial  houses  in  America,  of 
firms  and  corporations  which  would  make  it  a  point  of 
honor  to  respond  on  the  instant  to  demands  made  upon 
them;  and  the  securities  offer  a  certain  means  of  repay- 

236 


A    FIXED    LEGAL    RESERVE 

ment  even  if  the  borrowers  failed  to  respond,  as  they  are 
selected  for  their  marketability. 

Perhaps  it  will  be  observed  that  these  are  merely  good, 
old  -  fashioned  banking  principles,  and  that  plenty  of 
United  States  bankers  are  governed  by  them.  But  it  is 
well  known  that  some  of  the  important  banks  in  New 
York  are  closely  connected  with  market  interests  and 
transactions.  Quite  probably  in  that  fact  is  to  be  found 
the  reason  why  the  call  loans  are  a  source  of  more  strength 
to  the  Canadian  banks  in  Wall  Street  than  to  this  section 
or  party  of  the  native  institutions. 

NATIVE  BANKS  AND  THE  MONEY  MARKET 

If  there  were  in  operation  a  number  of  large  branch 
banks,  representative  of  the  different  parts  of  the  country, 
with  head  offices  and  stockholding  in  the  various  sections, 
and  New  York  agencies  or  branches  in  charge  of  officers 
similar  to  the  Canadian  agents,  then  the  call  loans  made 
by  them  in  New  York  would  most  probably  be  on  the 
same  basis  as  the  Canadian  loans,  and  they  would  be 
nearly  as  available  in  case  of  a  crisis.  The  word  "nearly" 
I  use  designedly,  for  there  is  another  circumstance  which 
operates  to  make  call  loans  in  New  York  owned  by  foreign 
bankers  more  surely  available  than  call  loans  owned  by 
the  home  bankers.  The  home  bankers  are  under  a  strong- 
er obligation  to  maintain  financial  stability  or  equilibrium. 
Thus  a  large  United  States  bank  might  desire  to  call  in 
some  of  its  loans  in  order  to  strengthen  its  store  of  cash; 
and  it  might  find  on  proceeding  to  do  so  in  a  time  of 
crisis  that  the  process  caused  great  disturbance  to  the 
markets  and  threatened  to  upset  values.  From  motives 
of  public  policy,  because  of  the  obligation  to  support  or 
uphold  the  good  name  of  the  city  and  the  nation,  under 
which  it  feels  itself,  it  may  desist  from  calling,  probably 
acting  with  other  banks.  The  Canadian  and  other  for- 
eign bankers  are  not  under  the  same  obligation  to  main- 

237 


A    RATIONAL    BANKING    SYSTEM 

tain  the  financial  equilibrium  in  that  city.  They  are,  of 
course,  concerned  in  the  maintenance  of  stable  conditions, 
but  not  to  the  same  extent  as  the  New  York  bankers  are 
concerned.  If  there  were  a  serious  crisis  in  Montreal,  and 
the  situation  there  demanded  the  shipment  of  much  gold 
to  the  Dominion,  the  Canadian  banks  would  liquidate 
their  loans  and  balances  in  New  York  as  expeditiously  as 
possible,  and  they  would  not  be  deterred  therefrom  by  the 
fact  that  their  action  threatened  to  upset  New  York  quite 
seriously.  It  would  be  the  same  if  the  New  York  banks 
carried  a  large  line  of  call  loans  and  balances  in  London 
as  an  integral  part  of  their  real  reserve  against  liabilities. 
If  that  were  the  case,  and  a  crisis  developed  in  the  Ameri- 
can metropolis,  the  New  York  bankers  would  not  hesi- 
tate to  call  home  their  funds  as  quickly  as  possible,  and 
they  would  continue  the  process  even  if  it  upset  London 
very  considerably.  In  both  these  cases  the  responsi- 
bility for  maintaining  financial  equilibrium  would  not 
lie  with  the  foreign  lenders,  and  for  that  reason  the  call 
loans  made  by  them  are  better  reserves  than  are  the 
call  loans  made  by  the  home  or  native  banks. 

CONTROLLING  THE  BRANCH  BANK'S  RESERVE 

In  the  head  office  of  each  one  of  the  large  Canadian 
banks  the  chief  executive  officer,  always  the  general 
manager,  will  have  a  daily  statement  of  the  reserves 
laid  before  him.  This  statement  will  comprise  the  cash 
held  by  the  branches  in  the  different  financial  centres, 
the  call  loans  in  New  York,  London,  Montreal,  and 
Toronto,  and  the  balances  carried  in  other  banks  home 
and  foreign.  A  number  of  the  smaller  banking  institu- 
tions rely  to  a  considerable  extent  upon  their  Canadian 
call  loans  as  reserves.  The  larger  institutions  do  not. 
For  it  is  well  known  that  the  Canadian  stock  markets  are 
not  broad  enough  or  strong  enough  to  stand  heavy  realiza- 
tion of  call  loans  by  banking  lenders. 

238 


A    FIXED    LEGAL    RESERVE 

Now,  the  general  manager  knows  in  a  broad  way  to 
what  the  bank  stands  committed  in  regard  to  new  loans  for 
its  regular  customers.  He  knows  in  what  season  the  ad- 
vances to  the  cotton  mill  customers  will  be  at  the  maxi- 
mum, when  the  grain  buyers  will  need  their  heaviest  ac- 
commodation, when  the  lumber  manufacturing  concerns 
will  lean  the  heaviest ;  and  with  regard  to  the  shoe  manu- 
facturers, the  farm  implement  manufacturers,  the  iron 
and  steel  industries,  the  jobbers  and  wholesalers  in  va- 
rious lines  of  merchandise,  railway  contractors,  retail  mer- 
chants, farmers,  and  all  the  other  classes  of  borrowers,  he 
knows  wrhen  their  demands  upon  the  credit  facilities  sup- 
plied by  the  bank  will  affect  its  resources  the  most.  He 
regards  the  bank's  obligation  to  support  its  mercantile 
borrowers  as  a  liability,  as  well  as  its  obligation  to  pay 
its  deposits  when  demanded.  So  far  as  the  deposits  are 
concerned  he  cannot  tell  what  their  course  will  be.  As 
long  as  the  bank's  credit  stands  high,  and  as  long  as  con- 
ditions are  prosperous,  he  can  count  with  more  or  less 
confidence  upon  a  steady  acquisition  of  new  funds  from 
the  depositors.  He  aims  to  make  these  gains  in  deposits 
provide  the  wherewithal  for  taking  up  a  number  of  new 
discount  accounts,  for  increasing  the  accommodation 
given  to  certain  of  the  bank's  old  customers,  and  for  add- 
ing something  to  the  cash  reserves. 

CRITICAL  OBSERVATION  OF  COMPETING  BANKERS 

All  branches  have  instructions  to  advise  head  office  at 
once  of  important  transactions  put  through  by  them.  In 
the  case  of  large  loans  the  authorization  of  the  executive 
must  be  obtained  in  advance ;  but  after  the  authorization 
has  been  given,  the  general  manager  expects  to  be  informed 
of  the  details  of  the  actual  carrying  out  of  the  transaction. 
Thus  the  manager  at  head  office  has  before  him  each 
morning  the  record  of  cash,  call  loans,  and  balances  as  at 
the  close  of  the  preceding  day.  There  will  also  be  ad- 

239 


A    RATIONAL    BANKING    SYSTEM 

vices  from  certain  of  the  branches  as  to  new  deposits 
gained  or  old  deposits  withdrawn,  new  loans  made  or  old 
loans  paid  off.  From  the  tenor  of  these  advices  he  can 
tell,  in  a  general  way,  whether  the  cash  is  likely  to  be 
augmented  or  subject  to  drain  in  the  next  few  days. 
Now,  this  general  manager  is  operating  the  bank  with  the 
object,  primarily,  of  earning  profits  for  the  stockholders. 
In  carrying  out  this  design  one  of  the  essentials  is  to 
maintain  a  showing  of  reasonable  strength  in  cash  assets 
at  all  times,  and  of  great  strength  in  cash  assets  on  some 
special  occasions.  The  law  does  not  prescribe  a  hard-and- 
fast  line  below  w^hich  his  reserves  must  not  fall;  but  the 
general  manager  is  acutely  conscious  of  the  fact  that  the 
skilled  professionals  at  the  head  of  the  various  competing 
banks  are  accustomed  to  sit  in  critical  judgment  upon  his 
monthly  statements  of  position,  and  he  knows  what  kind 
of  remarks  they  will  make  if  he  allows  his  available  re- 
serves to  fall  persistently  below  the  standard  regularly 
maintained  by  the  first-class  banks  of  the  country.  If  he 
does  that  there  is  danger,  too,  that  outside  financial  and 
commercial  circles  will  quickly  note  the  fact,  and  the  bank 
may  lose  deposits  or  other  good  business  in  consequence. 
To  offend  grievously  in  this  respect  for  any  length  of  time 
would  probably  bring  a  rap  from  the  Finance  Department 
of  the  Ottawa  government;  and  the  offending  banker 
would,  perhaps,  be  requested  to  curtail  his  loans.  His 
mortification  would  not  be  lessened  by  knowledge  that  his 
brother  bankers  in  other  institutions  were  aware  of  what 
had  happened  to  him.  He  knows  very  well,  also,  that  if 
his  bank  should  get  into  difficulties  it  might  be  necessary 
for  him  to  apply  to  these  brother  bankers  for  aid. 

FORTY  PER  CENT.  OP  AVAILABLE  ASSETS 

9  ' 

These  are  some  of  the  considerations  impelling  him  to 
keep  his  reserves  strong.  On  the  other  hand,  he  has  no 
wish  to  carry  a  great  deal  more  than  is  necessary  in  the 

240 


A    FIXED    LEGAL    RESERVE 

form  of  non-revenue-bearing  cash.  A  certain  degree  of 
strength  attracts  depositors  and  other  customers;  but  a 
too-great  strength  in  cash  reduces  the  bank's  profits  and 
diminishes  its  usefulness.  He  will,  therefore,  carry  so 
much  specie  and  legals,  so  much  of  balances  in  banks 
regarded  as  well  able  to  continue  paying  through  a  crisis, 
so  much  in  foreign  bills  of  exchange,  so  much  in  foreign 
call  loans.  All  these  items  taken  together  comprise  his 
reserve.  They  will  probably  amount  to  40  per  cent,  of 
his  liabilities.  Behind  them  will  lie  the  call  loans  in 
Canada,  which,  though  not  so  much  depended  upon, 
would  yield  a  certain  amount  of  cash  in  a  crisis;  and 
among  the  current  loans  and  discounts  would  be  a  number 
of  items  approaching  maturity  which  could  be  turned 
into  cash  as  they  came  due  without  throwing  the  com- 
mercial business  of  the  country  into  disorder. 

The  point  is  that  all  these  different  forms  of  reserve 
money  are  available  for  use ;  they  are  not  held  merely  in 
fulfilment  of  the  laws,  or  for  display  or  statement  purposes. 

CANADIAN  CASH  RESERVES  MORE  EFFECTIVE 

There  are  two  circumstances  which  make  a  given 
amount  of  cash  reserve  carried  by  the  Canadian  banks 
more  effective  than  the  same  amount  carried  by  the 
United  States  banks.  One  is  the  absence  of  laws  re- 
quiring  the  maintenance  of  a  fixed  reserve;  the  other  is 
the  existence  of  the  privilege  of  note  issue. 

Because  of  the  absence  of  legal  compulsion  regarding 
the  amount  of  reserve  that  must  always  be  on  hand,  the 
Canadian  bank  may  treat  the  greater  part  of  its  cash  as 
something  which  may  be  used  or  paid  out  if  the  necessity 
for  doing  so  arises.  Take  a  national  bank  in  the  United 
St^es  during  a  crisis  or  emergency.  In  its  case  there  is 
no  right  of  issue — at  least  none  worth  anything — and 
there  is  a  provision  for  a  legal  minimum  of  reserve. 
Therefore  in  paying  out  the  banker  keeps  in  mind  that 

241 


A    RATIONAL    BANKING    SYSTEM 

he  must  preserve  that  legal  minimum  inviolate,  and  that 
he  must  have  on  hand  something  for  use  as  counter  or 
till  money  which  will  meet  the  demands  of  his  depositors 
and  other  customers  for  a  short  while.  In  other  words, 
a  sum  of  his  resources  equal  to  the  legal  minimum  plus 
a  certain  amount  of  necessary  till  money  is  theoretically 
tied  up  and  remains  unavailable. 

The  Canadian  banker,  on  the  other  hand,  may  use  all 
his  cash  without  fear  of  breaking  the  law,  and  the  bank's 
own  unissued  notes  provide  the  bulk  of  the  till  money  he 
needs. 

WATCHED  BY  THE  BANKERS'  ASSOCIATION 

The  only  clause  in  the  Canadian  Bank  Act  which  deals 
with  the  matter  of  the  cash  reserves  is  that  directing  that 
the  banks  shall  have  40  per  cent,  of  such  cash  as  they 
do  hold,  in  the  form  of  Dominion  notes.  This  clause  was 
introduced  many  years  ago,  when  the  financial  position 
of  the  Dominion  Government  was  not  as  strong  as  it  is 
to-day,  and  was  obviously  designed  to  stimulate  the  cir- 
culation of  Dominion  notes.  Though  not  now  needed, 
it  has  been  retained  at  each  renewal  of  the  bank  charters. 

Though  the  laws  say  nothing  about  the  per  cent,  of 
reserves  that  shall  be  carried,  I  have  referred  to  some 
circumstances  which  operate  to  induce  the  banks  in  the 
Dominion  to  carry  reserves  of  proper  strength.  All  the 
banks  in  Canada  belong  to  the  Canadian  Banking  Asso- 
ciation. Every  month,  as  the  bank  return  appears,  the 
officers  of  the  association  compile  a  carefully  calculated 
statement  of  the  reserves  of  each  bank.  The  men  who 
construct  this  statement  and  study  it  are  skilled  bankers. 
They  know  what  are  the  circumstances  of  the  individual 
banks,  and  what  is  a  reasonable  and  proper  reserve  for 
each  one  to  carry.  They  take  into  account  the  changes 
of  condition  due  to  rotation  of  the  seasons,  the  expansion 
of  note  issues  and  of  current  account  balances ;  they  make 

242 


A    FIXED    LEGAL    RESERVE 

due  allowances  for  peculiarities  of  liabilities;  and  they 
count  the  secondary  reserve  as  well  as  the  cash.  If  it 
happen  that  a  particular  bank  is,  in  their  opinion,  spread- 
ing so  much  sail  as  to  endanger  itself  and  the  banks  in 
general,  the  Minister  of  Finance  will  be  officially  notified, 
and  a  representation  from  him  will  probably  result  in  a 
rectification  of  the  position  complained  about.  If  it  does 
not,  there  remains  the  extreme  disciplinary  measure  of 
expulsion  from  the  clearing-houses.  Thus  there  is  avail- 
able coercive  machinery  of  the  most  drastic  kind. 

SUPERVISION  BY  CLEARING-HOUSE  COMMITTEES 

With  regard  to  the  conditions  in  the  United  States,  I 
have  already  referred  to  the  increasing  disposition  shown 
by  the  clearing-house  committees  in  the  various  parts  of 
the  country  to  exercise  supervision  over  the  practices  of 
the  individual  member  banks.  In  their  respective  spheres 
of  jurisdiction  these  committees  now  take  an  active  part 
in  putting  pressure  upon  banks  that  offend  against  good 
banking  principles.  The  present  Comptroller  of  the  Cur- 
rency, Hon.  Lawrence  O.  Murray,  has  worked  effectively 
to  bring  about  co-operative  action  between  the  govern- 
mental bank  examiners  and  the  clearing-house  officials. 
And,  as  a  result  of  such  co-operation,  each  of  the  various 
clearing-houses  may  become  informed  of  objectionable  or 
dangerous  practices  of  banks  in  its  constituency.  An 
intimation  that  unless  these  practices  are  amended  the 
offender  will  be  expelled  from  the  clearing-house  would 
almost  certainly  have  beneficial  effects.  Possibilities  of 
improvement  to  the  banking  practice  through  the  gradual 
extension  of  this  policy  are  large.  It  promises  most, 
however,  for  the  cities  where  clearing-houses  exist.  It 
can  hardly  be  expected  to  exert  so  great  an  influence  upon 
the  actions  and  practices  of  banks  situated  in  the  smaller 
towns  and  in  the  country  districts  where  no  clearing- 
houses are  found. 

243 


A    RATIONAL    BANKING    SYSTEM 
ABOLISHING  THE  LEGAL  MINIMUM 

In  the  foregoing  paragraphs  I  have  indicated  how  the 
stipulation  as  to  a  fixed  minimum  reserve  might,  with 
safety  and  advantage,  be  removed  from  the  statute  book 
if  the  banking  business  were  in  the  hands  of  large  branch 
institutions.  Then  all  the  banking  offices,  even  those  in 
the  small  towns  and  country  districts,  would  be  amenable 
to  clearing-house  control.  And  if  the  central  clearing- 
house committees  or  the  American  Bankers'  Association 
were  made  responsible  for  keeping  the  individual  banks 
up  to  the  mark  as  regards  cash  reserves,  it  is  to  be  ex- 
pected that  the  detail  would  be  efficiently  handled.  With 
great  branch  banks  in  the  United  States  the  policy  of 
giving  supervisory  powers  to  the  association  or  the 
clearing-house  might  be  expected  to  give  better  results 
than  it  does  in  Canada,  because  there  would  be  the 
Government  examiners  to  give  the  association  or  clearing- 
house officers  information  whenever  any  bank  began  to 
develop  a  dangerous  situation.  The  Canadian  associa- 
tion is  without  this  information.  Its  officers  are  obliged 
to  calculate  and  guess  as  to  a  suspected  bank's  position, 
as  they  have  only  the  published  statements  to  guide 
them. 

INCREASED  USEFULNESS  OF  THE  BANKS 

Of  course,  while  the  banking  business  of  the  country  is 
in  the  hands  of  so  many  thousands  of  small  banks,  a  large 
number  of  them  operated  by  men  who  have  had  no  train- 
ing in  banking  and  who  have  no  desire  to  master  the 
principles  of  banking,  it  would  scarcely  be  wise  or  safe  to 
allow  them  a  full  measure  of  liberty  in  regard  to  their 
cash  reserves.  If  that  were  done  there  would  be  plenty 
of  so-called  bankers  who  would  put  practically  their  whole 
resources  into  loans  and  discounts  for  the  sake  of  earning 
large  profits.  The  law  endeavors  to  restrain  them  from 

244 


A    FIXED    LEGAL    RESERVE 

taking  this  course — sometimes  with  but  indifferent  suc- 
cess. On  the  other  side  are  the  thousands  of  bankers 
who  are  capable  enough  and  wise  enough  to  carry  safe 
reserves  even  if  the  law  did  not  direct  them  to  do  so. 
There  is  no  way  in  which  the  Government  can  discrimi- 
nate. It  cannot  say  to  the  good  and  wise  banker,  "You 
may  have  liberty  in  this  matter  of  reserves ;  the  restrictive 
provisions  are  intended  only  to  prevent  the  bad  or  ig- 
norant bankers  from  endangering  their  depositors  and 
the  communities  in  which  they  operate."  The  good  men, 
who  are  a  majority  of  the  whole,  must  be  bound  or  re- 
stricted in  order  that  the  inefficients  shall  be  prevented 
from  doing  harm.  So  that  it  is  right  and  fair  to  count 
among  the  advantages  which  the  United  States  would 
derive  from  the  institution  of  branch  banks  the  fact  that 
the  harmful  naming  of  a  legal  minimum  of  cash  reserve 
might  be  discontinued,  and  the  banks  of  the  country  put 
upon  the  same  footing  in  that  respect  as  the  joint-stock 
banks  of  Europe,  Australia,  and  Canada. 

There  is  no  doubt  their  usefulness  would  be  vastly  in- 
creased and  it  should  not  be  impossible  or  difficult  to 
devise  means  whereby  they  would  carry  cash  reserves 
ample  for  their  safety.  The  removal  of  that  legal  mini- 
mum clause,  combined  with  the  granting  of  real  rights  of 
note  issue  to  the  banks,  should  bring  into  the  available 
column  a  huge  amount  of  cash  which,  though  now  figuring 
as  reserve  in  the  statements  of  the  banks,  is  of  no  use  to 
them  whatever  unless  they  violate  the  laws.  At  the 
lowest  calculation  several  hundred  millions  of  show  re- 
serves would  be  changed  into  a  mobile  asset  available  for 
use  in  an  emergency;  and  there  would  not  likely  be  seen 
the  spectacle  of  an  association  of  great  banks  in  the 
country's  financial  capital  suspending  cash  payments 
while  they  had  $150,000,000  or  $170,000,000  of  specie  and 
legals  in  their  vaults. 


XIV 

THE   SAVINGS   BANK   BUSINESS 
THE  EASTERN  THEORY  REGARDING  SAVINGS  BANKS 

IN  conservative  banking  circles  in  the  eastern  part  of 
the  United  States  the  opinion  is  strongly  held  that 
the  savings  bank  business  should  be  kept  strictly  apart 
from  the  ordinary  or  commercial  banking  business.  The 
theory  is  that  as  the  wage  earners  and  the  poorer,  more 
ignorant  classes  of  the  public,  who  put  their  funds  into 
the  savings  banks,  are  not  well  equipped  for  making  a 
discriminating  selection  of  depository  banks,  the  state 
should  give  them  protection  through  providing  laws 
which  direct  the  investments  of  the  savings  banks — the 
institutions  which  they  are  supposed  to  patronize — into 
certain  securities  regarded  as  being  eminently  sound  and 
safe.  Thus  the  savings  banks,  when  investing  in  bonds, 
are  restricted  to  securities  which  fulfil  certain  severe  re- 
quirements. In  the  Eastern  states  there  is  an  honest 
effort  made  to  keep  the  two  kinds  of  banking  entirely 
apart;  and  national  banks  wishing  to  transact  a  savings 
bank  business  have  often  taken  the  trouble  to  organize 
separate  institutions  under  the  form  of  which  they  might 
take  funds  for  account  of  savings  depositors.  In  the  West 
and  Middle  "West  the  line  of  demarcation  between  the  two 
kinds  of  banking  is  not  so  sharply  drawn ;  in  that  part  of 
the  Union  commercial  banks  that  operate  savings  depart- 
ments are  quite  common.  Possibly  one  reason  is  that  the 
West  could  not  so  well  afford  to  have  a  large  part  of  its 
cash  resources  forbidden  to  its  commercial  borrowers. 

246 


THE    SAVINGS    BANK    BUSINESS 

DISPOSITION  OF  SAVINGS  BANK  RESOURCES 

In  the  report  compiled  by  the  National  Monetary  Com- 
mission, as  at  April  28,  1909,  the  savings  banks  in  the 
United  States,  mutual  and  stock,  are  given  as  seventeen 
hundred  and  three  in  number,  and  their  total  resources 
are  said  to  have  been  $4,072,710,105.  Of  this  total  no 
less  a  sum  than  $3,506,603,927  consisted  of  individual 
deposits.  The  disposition  of  the  savings  bank  resources 
was  as  follows:  In  real-estate  loans,  $1,620,131,446,  or 
about  40  per  cent,  of  the  whole;  in  state,  county,  and 
municipal  bonds,  $710,159,544,  or  over  17  per  cent.;  in 
railroad  bonds,  $769,980,509,  or  about  19  per  cent.;  in 
United  States  bonds,  other  bonds,  stocks,  etc.,  $233,130,- 
863,  or  about  6  per  cent. ;  in  loans  on  demand  and  on  time 
against  collateral,  $232,893,153,  or  about  6  per  cent.; 
in  balances  with  other  banks,  premises,  furniture,  cash 
and  cash  items,  and  other  assets,  $326,170,590,  or  about 
8  per  cent.  Among  the  items  of  resources  the  only  head- 
ings under  which  commercial  loans  and  discounts  might 
be  found  in  bulk,  are:  "Loans  on  demand,  unsecured  by 
collateral}" ;  "  On  time,  with  two  or  more  names,  unsecured 
by  collateral";  "On  time,  single-name  paper  unsecured 
by  collateral";  "Loans  not  classified,"  and  "Overdrafts." 
The  total  carried  under  those  headings  is  $180,244,000, 
or  about  4j  per  cent,  of  the  whole  resources.  In  Chapter 
II,  relating  to  the  cost  of  the  existing  system  of  banks,  it 
was  shown  that,  taking  all  classes  of  banks  in  the  United 
States,  only  23  per  cent,  of  their  total  resources  was  ap- 
plied to  commercial  loans  and  discounts.  The  figures 
now  given  show  how  important  is  the  part  played  by  the 
savings  banks  in  bringing  about  that  state  of  affairs.  Some 
of  the  economic  effects  of  the  policy  have  already  been 
discussed. 

THE  ENGLISH  OPINION 

I  may  now  devote  some  space  to  a  discussion  of  the 
question  regarding  the  necessity  or  desirability  of  keep- 

247 


A    RATIONAL    BANKING    SYSTEM 

ing  commercial  banking  and  savings  banking  religiously 
apart.  It  is  worthy  of  note  that  ideas  similar  to  those 
held  in  the  eastern  part  of  the  United  States  have  long 
been  held  in  England.  Twenty  and  twenty-five  years 
ago  the  best  authorities  there  were  almost  unanimously 
of  the  opinion  that  the  two  departments  of  banking 
should  be  kept  rigorously  apart.  It  was  accepted  as 
orthodox  doctrine  that  the  commercial  banks  might  take 
deposits  on  current  account,  and  that  they  might  take 
deposits  at  interest  from  the  people  of  their  districts, 
giving  receipts  or  certificates  therefor ;  but  it  was  thought 
improper  and  undesirable  for  them  to  operate  savings 
departments  and  thus  secure  possession  of  the  precious 
cash  accumulations  of  wage  earners  and  others  in  humble 
circumstances.  For  them  the  Government  provided  the 
post-office  and  the  trustee  savings  banks.  By  means  of 
these,  facilities  were  plentifully  supplied  to  all  districts, 
and  the  depositing  classes  using  these  conveniences  were 
given  the  strong  security  of  the  British  Government. 

LOCAL  BANKS  GIVING  PLACE  TO  BRANCH  BANKS 

Latterly,  if  one  may  judge  from  developments  in  the 
banking  business,  English  opinion  in  this  matter  has 
been  undergoing  a  change.  The  great  joint-stock  banks 
have  begun  to  institute  savings  departments  wherein  they 
accept  small  deposits  at  interest.  The  critics  scarcely  ven- 
ture to  say  that  humble  depositors  trusting  such  institu- 
tions as  the  National  Provincial  Bank  of  England, 
Lloyd's  Bank,  or  another  of  the  great  English  banks,  are 
in  peril  of  losing  their  funds ;  but  two  or  three  years  ago, 
when  the  movement  was  plainly  making  headway,  they 
took  the  ground  that  a  joint-stock  bank  transacting  a 
savings  business  should  keep  the  funds  derived  from  its 
savings  department  customers  strictly  apart  from  its 
ordinary  banking  funds.  Why  it  should  do  so  I  cannot 
see.  It  appears  to  me  that  if  the  bank  invests  the  funds 

248 


THE    SAVINGS    BANK    BUSINESS 

in  such  manner  as  to  be  surely  available  when  demanded, 
and  if  it  keeps  itself  generally  in  such  condition  that  it 
can  meet  all  its  liabilities  of  whatever  description  prompt- 
ly in  cash  as  they  accrue,  that  is  all  that  is  necessary. 
English  opinion  is  proverbially  conservative.  Usually  it 
takes  a  long  time  to  bring  about  a  change  of  opinion  on 
important  matters.  But  it  is  quite  probable  that  in  due 
time  even  the  most  conservative  critics  will  recognize 
that  the  change  which  has  been  effected  in  the  character 
of  English  banking  in  the  past  half  century  has  put  an 
entirely  different  complexion  upon  the  question  as  to 
whether  the  commercial  banks  should  or  should  not 
operate  savings  departments.  While  the  commercial 
banks  were  numbered  in  hundreds,  while  most  of  them 
were  small  concerns  not  subject  to  supervision  from  out- 
side, it  would,  of  course,  be  dangerous  for  all  parties  if 
the  savings  of  the  poor  and  ignorant  were  delivered  into 
their  keeping  on  a  large  scale. 

COMMERCIAL  BANKS  WITH  SAVINGS  DEPARTMENTS 

When  a  few  large  joint-stock  banks  with  hundreds  of 
branches  replaced  the  small  concerns  the  situation  became 
different.  Among  them  in  recent  years  failures  have 
been  exceedingly  rare,  and  as  the  banks  continue  to  de- 
crease in  number  and  increase  in  size  and  strength,  the 
chances  of  failure  or  of  loss  to  depositors  probably  grows 
less.  In  these  circumstances  there  is  not  the  same  neces- 
sity for  a  hard-and-fast  line  of  demarcation  between 
savings  deposits  and  commercial  deposits.  In  actual 
practice,  even  when  it  is  supposed  that  the  two  kinds  of 
deposits  are  kept  apart,  it  always  happens  that  the 
commercial  banks  get  a  certain  amount  of  what  are, 
in  fact,  savings  deposits.  The  character  of  a  deposit  is 
not  altered  by  issuing  a  certificate  of  deposit  for  it  instead 
of  a  savings  bank  pass  book.  So  it  comes  to  pass  that 
the  time  certificates  cover  deposits  of  workingmen  and 

249 


A    RATIONAL    BANKING    SYSTEM 

small  savers,  to  a  certain  extent,  in  all  places  where  com- 
mercial banks  operate. 

SAVINGS  BANK  CASUALTIES 

In  the  United  States  it  would,  perhaps,  be  possible  to 
trace  a  connection  between  the  Eastern  conception  of  the 
savings  bank  business  as  a  thing  properly  kept  apart  from 
commercial  banking  and  the  existence  of  the  thousands 
of  small  local  banks.  For  the  same  reasons  that  it  was 
considered  dangerous  in  England  to  have  the  small  local 
banks  act  as  custodians  of  a  huge  mass  of  savings  belong- 
ing to  the  poorer  classes,  it  appeared  to  be  undesirable  to 
have  the  thousands  of  national  and  state  banks  act  as 
custodians  of  the  people's  savings.  Therefore,  in  many 
states,  special  institutions  were  created  to  take  care  of 
the  savings  of  the  poor,  special  laws  were  passed  to  con- 
fine the  savings  bank  investments  to  a  few  safe  channels, 
and  attempts  of  the  ordinary  commercial  banks  to  develop 
a  savings  bank  business  were  frowned  upon  or  discour- 
aged. 

Now,  it  is  worth  noting  that  the  casualties  among  the 
savings  banks  of  the  United  States  are  sufficiently  nu- 
merous, in  spite  of  the  careful  legislation  with  which  their 
business  is  surrounded.  On  page  69  of  the  1909  Report 
of  the  Comptroller  of  the  Currency  is  a  statement  showing 
that  in  the  eighteen  years  1892  to  1909  (inclusive)  one 
hundred  and  fifty -three  savings  banks  failed,  with  lia- 
bilities of  $51,786,000  and  assets  of  $47,717,000.  It  is 
but  fair  to  say  that  sixty-eight  of  these  failures  oc- 
curred in  the  Middle  States  (sixteen  in  the  State  of  Iowa 
alone) . 

On  the  whole,  the  savings  banks  in  the  East  have  been 
made  reasonably  safe.  They  fail  occasionally  and  de- 
positors lose  money.  However,  apart  from  the  question 
of  security,  it  can  be  argued  that  the  system  has  a  grave 
defect.  It  cannot  be  made  to  provide  anything  but  an 

250 


THE    SAVINGS    BANK    BUSINESS 

inadequate  service  to  large  numbers  of  wage  earners  and 
small  savers  throughout  the  country.  In  the  localities 
where  they  are  established  the  savings  banks  provide 
good  facilities.  But  there  are  not  enough  of  them;  they 
do  not  penetrate  the  country  districts.  They  are  plenti- 
ful enough  in  certain  districts  of  the  cities  and  larger 
towns,  but  too  scarce  in  the  smaller  places. 

MUTUAL  AND  STOCK  SAVINGS  BANKS 

The  savings  banks  are  of  two  kinds — mutual  and 
stock.  The  mutual  banks  are  largely  of  a  philanthropic 
nature;  they  have  no  capital  stock  and  are  operated  for 
the  benefit  of  their  depositors.  After  expenses  are  paid 
the  profits  belong  to  the  depositors  and  are  either  paid  to 
them  as  interest  or  held  for  their  account  in  the  form  of  a 
reserve  fund.  The  stock  savings  banks  are  commercial 
enterprises  in  the  sense  that  the  profit  from  their  opera- 
tion, if  there  is  a  profit,  belongs  to  the  owners  of  their 
stock.  Depositors  are  merely  entitled  to  interest  at  a 
fixed  rate.  It  is  well  known  that  as  a  field  for  profits  the 
purely  savings  bank  business  is  not  inviting.  On  the 
one  hand,  it  is  necessary,  in  order  to  get  deposits,  to  pay 
a  high  rate  of  interest;  and,  because  there  are  no  current 
accounts  free  of  interest,  the  net  per  cent,  cost  of  deposits 
must  always  be  a  figure  higher  than  the  rate  of  interest 
paid.  And,  on  the  other  hand,  the  legal  restrictions  upon 
investments  serve  to  force  the  savings  bank  funds  into 
securities  earning  a  low  rate  of  return. 

So  in  the  one  case  the  provision  of  savings  bank  facilities 
depends  upon  philanthropic  efforts,  and  in  the  other  upon 
an  uncertain  and  unattractive  margin  of  profit.  There 
will  always  be  thousands  of  small  towns  and  villages 
wherein  the  philanthropic  spirit  is  not  high  enough  or 
strong  enough  to  provide  mutual  banks  and  where  there 
will  never  be  much  of  a  prospect  of  stock  savings  banks 
operated  at  a  profit. 

17  251 


A    RATIONAL    BANKING    SYSTEM 
THE  POST-OFFICE  BANKS 

Although  it  is  commonly  understood  that  postal  sav- 
ings banks  were  advocated  by  the  Republicans  in  the 
1908  election  as  a  reply  to  the  scheme  of  mutual  guaranty 
of  bank  deposits,  which  was  put  forward  by  the  Demo- 
crats, it  is  quite  likely  that  the  postal  banks  would  not 
have  received  such  strong  support  in  Congress  but  for 
the  deep-seated  conviction  in  the  minds  of  well-informed 
people  that  facilities  for  saving  in  the  rural  districts  will 
always  be  deficient  while  the  present  banking  system 
prevails.  There  is  no  doubt  that  postal  banks  established 
in  the  smaller  places  throughout  the  country  would  prove 
decidedly  beneficial  to  the  farmers  and  workingmen. 

In  England  these  banks  are  everywhere,  and  will  ac- 
cept small  deposits  from  any  one  wishing  to  pay  them  in. 
Because  of  the  existence  of  the  postal  banks  hardly  any 
person  lives  more  than  two  or  three  miles  from  a  con- 
fidence inspiring  depository. 

In  Canada  also  the  post-office  banks  have  served  a  use- 
ful purpose.  All  post-offices  that  are  money  order  offices 
are  postal  savings  banks.  Until  toward  the  close  of  the 
nineteenth  century  they  were  of  the  greatest  benefit  to 
the  people  of  Canada.  Now  they  are  declining.  Their 
decline  has  coincided  with  the  great  branch  extension 
movement  of  the  chartered  banks.  Since  1896  the  bank- 
ing offices  in  the  Dominion  have  more  than  trebled  in 
number.  At  the  present  rate  of  increase  they  will  have 
quadrupled  in  a  short  time.  The  meaning  of  this  is  that 
in  hundreds  of  places  where  prior  to  1896  the  post-office 
was  the  sole  depository  there  are  now  chartered  bank 
offices  eagerly  competing  for  the  savings  of  the  people. 

CHARTERED  BANKS  VERSUS  POSTAL  BANKS 

Although  the  post-office  banks  and  the  chartered  in- 
stitutions pay  the  same  rate  of  interest — 3  per  cent. — 

252 


THE    SAVINGS    BANK    BUSINESS 

the  latter  invariably  draw  deposits  from  the  post-office 
wherever  the  two  are  in  competition.  The  reason  is  that 
the  chartered  banks  offer  superior  facilities. 

In  order  to  operate  the  post-office  banks  economically 
it  is  necessary  to  centralize  the  bookkeeping  and  clerical 
work  at  Ottawa.  The  hundreds  of  postmasters  who  ac- 
cept deposits  from  the  people  have  nothing  to  do  with 
the  books  or  the  investment  of  the  funds.  When  a  de- 
posit is  received  the  postmaster  merely  enters  it  in  the 
customer's  passbook  and  sends  the  cash  to  Ottawa. 
When  he  wishes  to  withdraw  part  or  all  of  his  funds  the 
depositor  goes  to  his  local  postmaster  and  signs  a  requisi- 
tion or  withdrawal  order  for  the  sum  he  desires  to  with- 
draw. The  postmaster  sends  it  to  Ottawa,  and  in  the 
course  of  a  few  days  a  Government  check  on  the  Ottawa 
branch  of  the  Bank  of  Montreal  will  be  received  by  the 
depositor,  who  thereupon  takes  his  check  to  a  chartered 
bank  and  gets  the  money. 

If  the  business  were  done  in  another  manner — if,  for 
example,  the  ledgers  and  other  necessary  books  were  kept 
at  the  post-offices,  and  cash  provided  to  enable  the  post- 
masters to  pay  withdrawal  checks  immediately  on  pres- 
entation— the  expense  of  conducting  the  banking  op- 
erations would  rise  to  prohibitive  figures,  and  in  all 
probability  there  would  be  numerous  defalcations  discov- 
ered every  year.  Thus  the  enforced  delay  of  two,  three, 
or  more  days,  when  a  depositor  undertakes  to  withdraw 
his  money,  is  something  that  cannot  well  be  obviated.  Be- 
cause of  it,  and  because  of  the  other  minor  inconveniences 
of  dealing  with  a  Government  bureau,  the  general  body 
of  depositors  prefer  to  use  the  chartered  bank  branch. 
Their  experience  in  the  past  twenty  years  has  been  of  a 
nature  to  cause  them  to  consider  that  when  deposited 
with  one  of  the  large  branch  banks  their  savings  are 
practically  as  secure  as  if  held  by  the  Government.  In 
consequence  there  has  been  seen  a  steady  transfer  of 
balances  from  the  post-offices  to  the  ordinary  banks,  in 

253 


A    RATIONAL    BANKING    SYSTEM 

the  course  of  which  the  deposits  held  by  the  Government 
have  latterly  been  falling  at  the  rate  of  about  $1,500,000 
per  year,  notwithstanding  that  the  accounts  have  been 
credited  with  some  $1,700,000  per  year  for  interest. 

DECLINE  OF  THE  CANADIAN  POSTAL  BANKS 

People  who  do  not  understand  the  real  reason  for  the 
decline  in  the  deposits  held  by  the  post-offices  speak  of 
it  as  an  unfavorable  development,  or  as  something  to  be 
deplored;  but  all  who  understand  the  true  cause  of  the 
movement  and  its  effects  regard  it  with  undisguised  satis- 
faction. It  happens  because  the  facilities  supplied  by  the 
chartered  banks  are,  in  the  estimation  of  the  public, 
superior  to  those  supplied  by  Government,  and  because 
there  is  not  a  wide  or  very  noticeable  difference  between 
the  credit  of  the  larger  banks  and  that  of  the  Government. 
When  the  banks  acquire  possession  of  deposit  funds 
which  the  Government  had  been  carrying  the  funds  be- 
come at  once  available  to  the  country  retailers,  farmers, 
live  stock  buyers,  and  produce  buyers,  manufacturers 
and  wholesale  merchants,  who  wish  to  borrow.  While 
the  funds  are  held  by  the  Government  they  are  invested, 
except  the  cash  reserve  of  10  per  cent.,  in  public  works 
and  buildings,  subsidies  to  railroads,  and  the  other  cus- 
tomary governmental  expenditures;  they  are  not  avail- 
able to  the  commercial  classes  for  borrowing.  If  all  the 
balances  were  transferred  from  the  Government  to  the 
banks  (they  amount  to  a  little  less  than  $57,000,000)  the 
latter  institutions  would  probably  carry  against  them  a 
reserve  of  approximately  25  per  cent. — about  half  in 
cash  and  half  in  call  loans,  securities,  and  bank  balances. 
As  they  are  inactive  accounts  they  require  a  smaller  re- 
serve than  do  the  demand  deposits  or  current  accounts 
of  business  customers.  There  would  thus  be  left  an 
amount,  approximately  $42,500,000,  which  would  be  held 
subject  to  the  borrowing  demand  of  the  agricultural, 

254 


THE    SAVINGS    BANK    BUSINESS 

mercantile,  and  industrial  interests  of  the  country;  and 
the  tendency  of  the  change  would  be  either  to  cheapen 
the  cost  of  bank  loans  in  general  or  to  provide  a  more 
generous  supply  of  funds  during  a  stringency.  If  normal 
conditions  prevailed  in  the  world's  money  markets  it  is 
altogether  likely  that  the  Government  of  Canada  could 
borrow  in  London  the  funds  required  to  pay  off  the  de- 
positors in  the  post-office  at  a  less  cost  than  that  to 
which  it  is  now  subject.  Of  course  this  is  a  purely 
hypothetical  proposition.  The  Canadian  bankers  have 
no  very  earnest  desire  to  have  the  Government  hand  over 
to  them  its  savings  bank  balances.  The  wiser  ones 
among  them  recognize  that  the  postal  banks  are  not 
formidable  competitors  for  the  new  deposit  fund  created 
each  year,  and  that  it  is  well  to  have  a  depository  of  that 
kind  in  which  timid  women,  old  men,  and  ignorant  for- 
eigners can  take  refuge. 

POSTAL  BANKS  IN  THE  UNITED  STATES 

Any  estimate  of  the  probable  effects  of  the  institution 
of  postal  banks  in  the  United  States  requires  to  take  ac- 
count of  the  important  differences  in  the  conditions  pre- 
vailing respectively  in  the  United  States  and  in  Canada. 
The  most  important  of  these  differences  is  that  relating 
to  the  establishment  of  banking  offices  in  the  small 
places.  If  post-office  banks  of  the  Canadian  pattern 
are  provided  they  will  constitute  in  thousands  of  little 
villages  the  sole  respectable  depository  available  to  the 
people,  and  it  is  certain  that  they  would  be  utilized  ex- 
tensively. 

Another  important  consideration  is  that  owing  to  the 
smallness  and  lack  of  prestige  of  the  ordinary  banks  the 
average  depositor  would  not  be  disposed,  as  he  is  in 
Canada,  to  regard  the  two  classes  of  depositories  as 
nearly  equal  in  point  of  security.  In  other  words,  the 
credit  of  the  post-office  banks  in  the  United  States  would 

255 


A    RATIONAL    BANKING    SYSTEM 

be  distinctly  superior  to  that  of  the  ordinary  banks, 
whereas  in  Canada  the  difference  is  not  marked. 

Owing  to  these  two  considerations  it  seems  inevitable 
that  the  post-office  banks  would  accumulate  a  very  large 
total  of  deposits;  and  no  doubt  a  part  of  their  accumu- 
lations would  be  at  the  expense  of  the  ordinary  banks. 

Two  methods  of  disposing  of  the  funds  were  con- 
sidered: The  first  was  for  the  Government  to  redeposit 
the  funds  received  at  each  post-office  in  banks,  national 
and  state,  operating  in  that  district  or  locality.  In  this 
way  the  funds  were  to  be  kept  in  the  locality  to  which 
they  belonged.  The  other  method  was  to  give  the 
Government  the  right  to  invest  the  funds  in  Government 
bonds  in  time  of  war  and  when  the  public  credit  was  other- 
wise threatened. 

POSTAL  BANKS  MAY  PROMOTE  THE  BRANCH  BANK  IDEA 

There  are  grave  objections  to  be  urged  against  either 
plan.  If  the  funds  are  redeposited  in  commercial  banks 
in  all  localities  it  is  certain  that  many  banks  will  be  un- 
able to  return  the  deposits  when  demanded.  And  if  the 
funds  are  invested  in  Government  bonds  it  means  that 
a  huge  additional  sum  of  cash  resources  will  be  placed 
beyond  the  reach  of  the  commercial  classes.  The  whole 
question  of  the  effects  to  be  produced  by  the  postal  banks 
is  doubtful  or  obscure.  It  would  be  much  easier  to  trace 
the  probable  effects  if  there  were  branch  banks  in  opera- 
tion. Indeed  it  would  not  be  at  all  surprising  if  the  in- 
stitution of  postal  banks  gave  an  impetus  to  the  move- 
ment for  branch  banks.  It  may  well  be  that  the  bankers 
of  the  United  States  will  find  that  the  only  way  for  them 
to  compete  effectively  with  the  Government  for  small 
savings  deposits  is  for  them  to  convert  their  small  single- 
office  banks  into  branch  banks  and  thus  raise  their  pres- 
tige in  the  eyes  of  the  people  and  at  the  same  time  push 
their  offices  into  the  smaller  places. 

256 


THE    SAVINGS    BANK    BUSINESS 

WHEN  SAVINGS  FUNDS  ARE  USED  IN  COMMERCIAL 
DISCOUNTING 

As  an  argument  for  allowing  large  branch  banks,  de- 
voted to  commercial  banking,  to  operate  savings  depart- 
ments, it  can  be  urged  that  as  a  whole  the  mass  of  funds 
they  would  accumulate  in  that  way  would  be  peculiarly 
adapted  for  use  as  advances  to  mercantile  and  industrial 
borrowers.  As  every  banker  knows,  the  aggregate  of 
savings  department  balances  of  a  bank  enjoying  con- 
tinuously good  credit  tends  to  increase  steadily  from 
month  to  month  and  year  to  year.  They  possess  a  degree 
of  permanence  qualifying  them  eminently  for  use  in 
granting  credits  to  the  business  interests  which  require 
steady  support  throughout  the  year.  If  it  be  said  that 
the  diversion  of  a  huge  mass  of  the  savings  bank  fund 
from  bonds  into  commercial  discounts  would  embarrass 
the  municipalities,  railroads,  etc.,  which  now  secure  neces- 
sary funds  through  the  sale  of  their  securities  to  the 
savings  banks,  it  can  be  replied  that  if  the  banking  facil- 
ities of  the  country  were  entirely  adequate  there  would 
be  an  economizing  in  security  issues  by  industrial  and 
other  companies,  because  they  would  be  able  to  finance 
their  requirements  more  largely  by  means  of  bank  ad- 
vances. Many  corporations  now  issue  bonds,  paying  in- 
terest thereon  from  year  end  to  year  end,  and  carrying 
a  large  part  of  the  proceeds  in  hand,  not  earning  any 
revenue  for  a  portion  of  every  year,  where  they  would,  i' 
they  might  go  to  a  large  bank  and  negotiate  a  loan  of  two 
or  three  million  dollars  for  five  or  six  months,  depend 
upon  bank  accommodation  and  effect  a  notable  saving  in 
interest  charges.  It  can  be  said  also  that  branch  banks 
would,  as  a  matter  of  course,  invest  a  certain  proportion 
of  their  deposits  in  the  classes  of  bonds  now  purchased 
by  the  savings  banks.  Possibly  it  would  be  necessary 
for  issuers  of  high  grade  bonds  to  have  a  larger  recourse 
to  Europe.  It  should  be  remembered  that  under  a  sys- 

257 


A    RATIONAL    BANKING    SYSTEM 

tern  of  large  branch  banks  it  would  come  about,  in  all 
likelihood,  that  the  banks  had  more  or  less  always  a  formi- 
dable "call"  upon  the  gold  resources  of  London,  Paris,  and 
Berlin.  They  would  find  it  conducive  to  financial  stability 
in  America  to  carry  a  respectable  part  of  their  available  re- 
serves in  the  form  of  European  demand  loans,  bills,  and  bal- 
ances. 

THE  CREDIT  OF  THE  BRANCH  BANKS 

Possession  of  the  right  of  uncovered  note  issue,  utiliza- 
tion of  the  surplus  or  unnecessary  cash  circulation  of  the 
country,  and  the  massing  of  reserves  at  the  centres  should 
enable  them  to  do  this  without  at  all  injuring  American 
borrowers.  As  under  the  present  system  Europe  is  under 
the  necessity  of  making  large  advances  at  call  and  at  short 
date  to  the  New  York  market,  a  reversal  of  position  might 
set  free  a  considerable  amount  of  European  capital  which 
would  be  available  for  investment  in  American  bonds. 

I  have  dealt  elsewhere  with  the  matter  of  the  security 
or  safety  of  the  depositors.  There  is  reason  to  suppose 
that  branch  banks  of  the  type  of  the  Bank  of  Massa- 
chusetts and  the  Bank  of  Minnesota,  subject  to  the  con- 
ditions and  regulations  I  have  detailed,  would  offer 
humble  depositors  a  better  security  than  they  now  have. 
After  a  few  decades  of  clean  and  honorable  attention  to 
the  financial  and  commercial  interests  of  the  country 
their  credit  should  be  so  nearly  equal  to  that  of  the  Gov- 
ernment that  they  might  be  expected  to  attract  prac- 
tically the  whole  deposit  business  wherever  they  estab- 
lished branches.  So  in  this  way  the  branch  institutions, 
provided  they  had  the  privilege  of  issuing  uncovered 
notes  to  serve  as  currency,  and  the  unquestioned  right 
to  operate  savings  departments  in  connection  with  their 
ordinary  business,  could  be  expected  to  supply  facilities, 
the  most  adequate  to  the  less  important  localities. 

I  wish,  however,  to  emphasize  my  statement  that  in 
order  to  give  the  country  people  the  fullest  measure  of 

258 


THE    SAVINGS    BANK    BUSINESS 

benefit  the  banks  would  require  both  the  right  of  issue 
and  the  right  to  operate  savings  departments.  Possess- 
ing both,  they  would  find  profit  in  placing  branches  at 
small  hamlets  with  only  a  few  business  establishments. 
At  many  such  places  the  savings  bank  business  of  the 
farmers  would  be  almost  the  sole  attraction.  I  have  already 
explained  how  important  a  factor  is  the  right  of  issue  in  in- 
ducing the  banks  to  open  and  maintain  branch  offices. 

AN  AGREEMENT  REGARDING  THE  DEPOSIT  RATE 

A  feature  of  the  savings-bank  business  of  the  Canadian 
banks  which  I  have  not  yet  dealt  with  may  with  pro- 
priety be  discussed  here.  It  is  the  uniformity  of  the 
rate  of  interest  paid.  From  the  Atlantic  to  the  Pacific 
the  chartered  banks  of  Canada  quote  3  per  cent,  as  the 
maximum  rate  of  interest  on  deposits.  The  rate  has  not 
varied  for  over  ten  years.  In  periods  of  ease  and  periods 
of  stringency  it  has  been  the  same.  Naturally  this  uni- 
formity has  led  to  accusations  of  monopoly.  Parties  un- 
friendly to  the  banks  say  that  a  great  monopoly  exists, 
and  that  through  the  Bankers'  Association  the  people  are 
held  in  an  iron  grip.  It  is  also  said  that  a  few  bankers  in 
Montreal  and  Toronto  control  the  banking  business  of 
the  whole  country.  I  admit  that  the  branch  system 
tends  to  concentration  of  banking  power;  and  where 
there  is  concentration  of  power  the  argument  of  monopoly 
is  usually  raised.  For  example,  the  London  Economist  in 
a  recent  half-yearly  review  of  banking  statistics,  after 
mentioning  the  steady  reduction  in  the  number  of  banks 
in  England  and  Wales,  points  out  that  a  few  gentlemen  in 
London  control  80  per  cent,  of  the  banking  resources  of 
the  country. 

WIDE  DISTRIBUTION  OP  STOCK  OWNERSHIP 

A  statement  of  this  kind  made  in  reference  to  the  banks 
is  apt  to  convey  an  erroneous  impression  unless  it  is  ac- 

259 


A    RATIONAL    BANKING    SYSTEM 

companied  by  certain  explanations.  On  hearing  it  an 
unlearned  reader  might  suppose  that  the  gentlemen  in 
question  exercised  their  control  by  virtue  of  stock  owner- 
ship or  of  some  proprietary  right  resident  in  themselves; 
whereas,  in  fact,  that  is  not  the  case.  The  gentlemen 
wielding  the  power  referred  to  are  either  the  hired  ser- 
vants or  the  representatives  in  trust  of  democratic  bodies 
of  proprietors.  In  the  cases  of  the  British  joint-stock 
banks,  and  of  the  Canadian  chartered  banks,  the  stock- 
holding is  widely  distributed;  and  the  directors  do  not, 
as  a  rule,  hold  office  because  of  a  preponderating  owner- 
ship of  voting  power.  The  circumstance  must  always 
operate  to  mellow  the  effect  of  the  concentration  of  power. 
I  have  indicated  how  the  same  conditions  might  be  en- 
sured for  branch  banks  in  the  United  States.  Every- 
body who  has  had  experience  in  the  banking  business  in 
Canada  is  aware  that  the  slow  reduction  in  the  number 
of  the  banks  has  not  lessened  the  banking  competition. 
Though  it  may  truthfully  be  said  that  a  few  banks  (sixteen 
or  seventeen)  control  the  bulk  of  the  banking  resources 
of  the  Dominion,  it  is  also  a  fact  that  those  few  institu- 
tions are  constantly  engaged  in  the  keenest  competition 
among  themselves.  They  agree  to  pay  a  uniform  rate 
upon  deposits;  but  the  man  who  argued  from  that  that 
there  was  no  competition  for  deposits  would  be  entirely 
wrong  in  his  conclusion.  There  is  competition,  and  it  is 
of  the  sharpest  kind.  Any  person  having  access  to  the 
branch  correspondence  in  the  head  office  of  a  large  bank 
would  find  that  from  branches  in  every  part  of  the  country 
there  were  bitter  and  endless  complaints  about  the  ac- 
tivity of  competitors. 

COMPETITION  IN  ESTABLISHING  BRANCHES 

Each  branch  manager  knows  that  one  certain  way  to 
improve  his  personal  prospects  is  through  building  up 
the  good  business  of  his  branch,  both  deposits  and  loans. 

260 


THE    SAVINGS    BANK    BUSINESS 

He  always  has  a  covetous  eye  for  the  business  of  other 
banks  in  his  locality,  and  often  enough  he  goes  beyond 
the  bounds  of  decency  in  his  efforts  to  get  a  good  deposit 
or  a  good  discount  account.  He  may  not  offer  a  higher 
rate  of  interest  for  the  deposit,  but  he  can  and  does  offer 
other  things  which  have  the  same  effect.  He  will  collect 
at  par  or  perform  without  charge  other  services  for  the 
customer.  Even  if  the  Canadian  banks  were  reduced  to 
a  dozen  or  fifteen  all  told,  it  is  strongly  probable  that  they 
would  be  engaged  in  ceaseless  competition  at  all  branch 
points.  At  the  present  time  there  is  one  kind  of  com- 
petition particularly  in  evidence.  It  is  the  competition 
to  establish  branches.  Whenever  a  new  town  is  started 
in  the  West  there  is  a  race  for  the  point.  Sometimes  two 
or  three  banks  will  open  in  a  very  small  place.  Many  of 
these  branches  are  operated  at  a  loss  for  a  considerable 
time. 

HEALTHY  COMPETITION  ENSURED 

To  me  it  seems  that  there  would  be  a  greater  likelihood 
in  the  United  States  than  in  Canada  of  branch  banks 
maintaining  an  energetic  and  beneficial  competition. 
The  existence  of  thirty  or  forty  very  powerful  banks 
meeting  each  other  at  many  different  points  should  ensure 
the  keenest  competition.  And  instead  of  thirty  or  forty 
banks  there  would  probably  be  two  hundred  or  more. 
They  could  not  make  excessive  profits  without  drawing 
new  banks  into  the  field.  The  minimum  capital  for  new 
banks  with  note  circulating  privileges  might  be  placed 
high  enough  to  ensure  that  only  strong  institutions  would 
be  chartered,  and  yet  not  so  high  as  to  make  it  difficult 
to  organize  new  banks  in  case  an  excessive  rate  of  profit 
accrued  to  capital  invested  in  banking. 


XV 

FOREIGN  TRADE  AND  INTERNATIONAL  STANDING 
POSITION  OP  THE  UNITED  STATES 

IN  his  address  on  ''Abnormal  Features  of  American 
Banking,"  delivered  at  the  Denver  Convention  of  the 
American  Bankers'  Association,  Sir  Edmund  Walker, 
the  well  known  Canadian  banker  to  whose  utterances 
I  have  already  referred,  discussed  the  necessity  of  re- 
forms in  the  banking  system  of  the  United  States.  Tow- 
ward  the  conclusion  of  his  speech  he  said  it  was  de- 
sirable that  such  species  of  banking  as  was  introduced 
should  be  able  to  create,  among  other  things,  a  condition 
under  which  "a  great  international  banking  business 
might  be  created,  and  you  may  do  justice  to  your  over- 
seas possessions,  to  the  great  ports  of  export  and  import, 
to  your  mercantile  marine,  and  to  your  position  among 
the  great  nations  of  the  earth."  While  dealing  with  this 
department  of  the  subject,  I  cannot  forbear  quoting  the 
remarks  of  Mr.  S.  D.  Scudder,  of  the  International  Bank- 
ing Corporation,  New  York  City,  before  a  bankers'  associa- 
tion meeting  a  few  years  ago.  Mr.  Scudder 's  address  was 
on  the  subject  of  "  International  Banking,"  and  he  defined 
it  as  understood  in  its  true  commercial  sense  to  be  "those 
facilities  which  aid  in  the  financial  settlements  necessary 
for  the  exporting  abroad  of  local  products  and  the  im- 
porting of  foreign  goods." 

How  LONDON  LEVIES  TRIBUTE 

In  order  to  illustrate  the  conditions  now  prevailing 
he  gave  the  following  example: 

262 


FOREIGN  TRADE  AND  INTERNATIONAL  STANDING 

"  I  have  friends  in  a  foreign  port  who  would  gladly  pro- 
cure there,  if  they  could,  some  exchange  in  dollars  with 
which  to  pay  for  goods  bought  from  their  Boston  house. 
But  that  foreign  country  sells  and  exports  annually  so 
small  a  quantity  of  merchandise  to  the  United  States, 
because  of  our  prohibitive  tariff  laws,  that  no  such  ex- 
change is  to  be  had,  and  thus  it  happens  that  settlements, 
even  for  goods  imported  there  from  the  United  States, 
must  be  made  through  London.  My  friends  settle  with 
their  own  house  in  Boston  by  purchasing  pounds  sterling 
drafts  on  London.  The  Boston  people,  when  they  re- 
ceive these  drafts,  then  sell  them  to  a  foreign  exchange 
banker  for  so  many  dollars.  Thus  London  gets  a  tribute 
on  business  which  never  originated  there,  on  goods  which 
never  went  there,  and  on  a  settlement  which  but  for  our 
prohibitive  policy  would  naturally  have  been  made  direct. 
Is  it  not  clear  that  we  Americans  must  stand  all  the  loss 
on  such  transactions?  Is  it  not  plain  that  in  quoting 
competitive  prices  this  tribute  abroad  must  be  taken 
into  consideration? 

"  You  may  ask :  If  an  American  bank  or  its  branch  were 
located  there,  would  Europe  still  collect  this  tribute?  I 
reply:  Yes,  under  our  present  prohibitive  trading  laws 
the  larger  proportion  of  all  commissions  must  necessarily 
go  abroad;  because  in  the  absence  of  sufficient  export 
trade  from  such  a  place  to  the  United  States  any  Ameri- 
can bank  or  branch  there  would  itself  be  compelled  to 
settle  with  its  United  States  head  office  through  Europe. 
The  inverse  argument  also  holds  good  in  such  a  case. 
Wherever  such  a  foreign  country  is  disposing  of,  or,  we 
will  say,  clearing,  most  of  its  foreign  goods,  there  also  it 
will  likely  purchase  most  of  its  wants.  And  so  it  happens 
that  London  and  Paris  and  Berlin  are  to-day  capturing 
the  world's  most  profitable  trade,  and  levying  their  bank- 
ing tribute  on  every  portion  of  it,  because  of  laws  permit- 
ting their  own  merchants  to  trade  and  barter  in  the 
markets  of  the  world.  Leave  the  banker  entirely  out  of 

263 


A    RATIONAL    BANKING    SYSTEM 

the  deal,  and  see  how  it  works  with  the  exporter  who  is 
rich  and  does  not  have  to  borrow.  Supposing  for  the 
cotton  you  take  abroad  it  were  permitted  to  bring  back 
some  goods  to  be  sold  here  at  a  reasonable  profit,  wouldn't 
your  cotton  shipment  and  the  money  it  represents  be 
'earning  its  way  back,'  so  to  speak?  But  our  high  pro- 
tective tariff  forbids  the  importation,  and  so  you  are 
compelled  to  ask  that  gold  be  sent  back,  not  only  at  a 
great  cost  and  loss  to  you  in  dollars  and  cents,  but  also 
in  ultimate  loss  of  trading  opportunity  with  the  people  to 
whom  you  have  been  selling  your  cotton." 

THE  FOREIGN  BANKERS  IN  NEW  YORK 

In  the  foregoing  quotation  the  matter  of  the  tariff 
overshadows  the  purely  banking  part  of  the  question. 
I  do  not  intend  in  this  work  to  discuss  tariff  questions. 
However,  I  have  included  the  whole  quotation  because  of 
the  co- relation  of  the  subjects.  I  give  the  following 
further  excerpt  from  the  same  address  by  Mr.  Scudder, 
because  of  its  pertinency  to  the  matter  under  discus- 
sion: 

"Although  an  American  by  birth  and  long  ancestry, 
I  had  the  opportunity  of  getting  my  initial  financial  edu- 
cation in  an  English,  or,  rather,  in  a  Canadian  bank.  Very 
often  in  those  days,  while  trying  to  grasp  the  meaning  of 
that  great  world's  business  which  was  being  done  by  the 
Bank  of  Montreal  and  similar  institutions  of  foreign 
origin,  I  wondered  why  no  large  home  organization  then 
existed  in  the  United  States  which  was  especially  fitted 
for  work  pertaining  to  those  transactions  daily  taking 
place  between  merchants  of  the  Old  World  and  those  of 
our  own  country.  I  thought  it  strange  that  while  every 
leading  nation  of  the  world  had  branch  banks  or  banking 
representatives  here,  not  one  of  our  financial  institutions 
was  at  that  time  represented  abroad.  It  was  a  constant 
source  of  astonishment  to  me  that  the  American  mer- 

264 


FOREIGN  TRADE  AND  INTERNATIONAL  STANDING 

chant  and  the  American  manufacturer  had  not  that  finan- 
cial backing  abroad  which  was  vouchsafed  to  the  business 
men  of  other  lands  by  their  own  banks.  Not  that  there 
was  any  scarcity  in  the  United  States  of  private  firms 
and  banks  engaged  in  international  banking;  but  I 
found  that  almost  without  exception  these  firms,  and 
even  the  banks,  either  were  of  foreign  origin,  possessed 
a  foreign  partnership,  or  else  represented  on  this  side 
some  foreign  bank  or  banking  house.  At  the  same  time 
it  was  strongly  impressed  upon  me  that  by  far  the  larger 
proportion  of  all  strictly  commercial  international  trans- 
actions on  this  side  pertained  to  exports  and  not  imports. 
And  so  the  conviction  came,  and  I  think  it  is  entirely  cor- 
rect, that  the  reason  for  the  existence  in  our  land  of  these 
great  foreign  banks  and  foreign  private  houses  was 
primarily  because  of  the  staple  export  trade  which  we 
were  furnishing  to  those  countries." 

USEFULNESS  OP  FOREIGN  BRANCHES 

From  this  last  paragraph  it  is  possible  to  get  some  idea 
as  to  the  services  performed  for  the  trade  of  their  own 
country  by  bank  agencies  or  branches  established  abroad. 
Again  resorting  to  Canada's  case,  it  will  be  seen  that 
many  of  the  important  banks  are  represented  by  a  num- 
ber of  branches  in  foreign  lands.  Canadian  bank  branches 
and  agencies  are  found  in  Newfoundland,  the  Bermudas, 
the  United  States,  Mexico,  Cuba,  Porto  Rico,  the  Ba- 
hamas, and  London,  England.  One  may  well  understand 
that  these  agencies,  wherever  they  exist,  are  potential 
factors  in  building  up  Canada's  foreign  trade,  in  extend- 
ing her  good  name,  and  in  attracting  capital  to  the 
Dominion,  while  at  the  same  time  doing  a  useful  service 
in  discovering  profitable  investments  abroad  for  Canadian 
capital.  No  matter  in  what  forms  the  commercial  and 
productive  activity  of  these  foreign  peoples  finds  ex- 
pression, the  men  in  the  Canadian  branches  are  certain 

265 


A    RATIONAL    BANKING    SYSTEM 

to  be  thoroughly  informed  about  the  whole.  They  also 
bring  with  them  a  reasonably  full  knowledge  of  the  vari- 
ous goods  which  the  different  provinces  of  the  Dominion 
require  to  buy  or  sell  abroad.  Loyalty  to  Canada,  to 
the  banks  employing  them,  and  to  the  localities  in  which 
they  are  situated  impels  them  to  open  new  channels  of 
trade  with  the  Dominion  when  such  a  course  is  likely  to 
result  in  mutual  profit  for  the  trading  nations.  It  should 
be  observed  here  that  usually  the  establishment  of  the 
banking  facilities  follows  the  establishment  of  trade 
rather  than  creates  it.  For  example,  it  is  the  banking  in- 
stitutions especially  identified  with  the  Province  of  Nova 
Scotia  that  have  established  the  branches  in  the  West 
Indies.  It  is  easy  to  trace  the  course  of  events  that 
induced  them  to  take  that  step.  They  were  called  on 
constantly  to  finance  for  their  customers,  the  West  India 
merchants  of  Halifax,  large  transactions  involved  with 
the  importation  of  sugar,  tobacco,  rum,  and  other  tropi- 
cal products,  and  with  the  exportation  of  Canadian  fish 
and  other  products.  With  no  branch  establishments  in 
the  West  Indies  they  enjoyed  only  a  part  of  the  profitable 
exchange  business  resulting  from  this  trade.  With 
branches  established  at  the  principal  tropical  export 
centres  they  might  hope  to  have  practically  the  whole 
of  it.  Negotiation  of  bills  of  exchange  drawn  against 
exports  to  Canada  would  almost  certainly  fall  to  them. 
Also  the  accounts  of  Canadians  resident  in  the  tropics 
would  naturally  gravitate  into  their  ledgers.  After  the 
branches  were  opened  it  transpired  that  the  banks  se- 
cured a  large  share  of  remunerative  business  outside  the 
Canadian  trade.  Thus  the  Royal  Bank  of  Canada  was 
made  the  intermediary  for  paying  off  the  Cuban  troops 
when  they  were  disbanded;  and  it  and  the  other  Cana- 
dian banks  now  negotiate  an  important  share  of  the  ex- 
change resulting  from  shipments  of  tropical  products 
to  the  United  States,  to  Europe,  and  other  parts  of  the 
world. 

266 


FOREIGN  TRADE  AND  INTERNATIONAL  STANDING 
FOREIGN  BRANCHES  A  GOOD  ADVERTISEMENT 

Furthermore,  the  foreign  branches  serve  as  a  valuable 
advertisement  for  the  Dominion.  The  people  of  Cuba, 
of  Mexico,  and  of  other  foreign  countries  are  impressed 
with  the  idea  that  Canada  is  a  wealthy  and  important 
country  when  they  note  that  she  establishes  branch  offices 
of  great  banks  in  their  principal  cities  and  trading  centres, 
that  she  sends  out  clerks  to  man  and  operate  them,  and 
provides  capital  to  carry  on  a  large  share  of  the  local 
business.  When  they  consider  that  in  this  respect  of 
providing  banking  facilities  for  them  Canada  is  equal  or 
superior  to  the  United  States — notwithstanding  that  the 
latter  country  is  nearer  and  far  more  populous  and  wealthy 
— their  opinion  of  the  banking  machinery  and  resources 
of  the  Dominion  must  be  highly  favorable. 

UNITED  STATES  BANKING  AS  IT  APPEARS  TO  FOREIGNERS 

There  is  yet  another  respect  in  which  the  non-branch 
system  of  banks  handicaps  the  United  States  in  acquiring 
a  high  standing  abroad.  When,  in  the  course  of  their 
business  operations,  the  great  bankers  of  Europe  have 
their  attention  drawn  to  United  States  banking,  they  do 
not  see  it  in  the  light  of  the  large  totals — many  billions  of 
dollars — representing  the  aggregate  of  the  country's 
banking  resources.  In  the  ordinary  course  the  banking 
system  of  the  United  States  comes  before  their  notice  in 
the  form  of  drafts  and  obligations  of  the  individual  banks. 
Of  these  there  are  some  few.  in  the  large  cities  the  stand- 
ing of  which  is  well  known.  But  of  the  great  majority 
the  European  bankers  know  little  or  nothing  beyond  the 
fact  that  their  names  are  to  be  found  in  the  banking  di- 
rectory, which  may  also  contain  a  list  of  the  principal 
executive  officers  and  perhaps  the  amount  of  capital  and 
surplus  and  a  few  items  of  the  balance  sheet.  This  by 
itself  conveys  practically  no  information  to  the  foreign 
18  267 


A    RATIONAL    BANKING    SYSTEM 

banker's  mind  as  to  whether  the  various  institutions  are 
sound  or  not.  He  knows  very  well,  if  the  document  he 
is  required  to  act  upon  is  a  draft  on  New  York  or  a  check 
on  that  or  another  American  centre,  that  the  drawer  or 
drawee  bank  may  fail  before  collection  can  be  made.  He 
knows  that  there  is  a  constant  succession  of  failures,  and, 
as  likely  as  not,  he  has  himself  been  involved  in  the  failure 
of  small  United  States  banks  from  time  to  time.  Also, 
while  the  New  York  City  banks  and  the  banks  in  the 
other  principal  centres  are  well  informed  about  and  care- 
ful to  observe  the  various  European  usages  and  customs 
having  to  do  with  financial  transactions,  there  are  a 
great  many  bankers  in  the  interior  who  transact  their 
European  business  and  their  foreign  exchange  busi- 
ness either  ignorantly  or  carelessly,  and  create  endless 
trouble  and  annoyance  for  their  foreign  and  New  York 
correspondents.  Of  course,  under  a  system  of  branch 
banks  the  dealings  with  European  and  other  foreign 
countries  would  be  carried  on  under  careful  regulations 
and  instructions.  Probably  all  drafts  and  documents 
would  be  passed  through  a  central  branch  which  pos- 
sessed officers  and  clerks  thoroughly  familiar  with  foreign 
usages  and  customs. 

UNITED  STATES  BANK  DRAFTS 

To  illustrate  how  the  existence  of  small  banks  in 
such  large  numbers  affects  the  American  standing  abroad 
I  have  mentioned  Europe,  but  it  is  not  necessary  to  go 
so  far  afield.  A  good  illustration  can  be  had  by  noting 
the  practice  of  the  bankers  in  Canada  as  it  relates  to  drafts 
and  checks  of  United  States  banks.  In  my  several  years' 
experience  in  active  banking  in  Ontario  and  in  western 
Canada — covering  service  in  the  teller's  box  and  as  branch 
manager — I  was  frequently  called  on  to  deal  with  parties 
presenting  drafts  on  New  York  drawn  by  banks  in  various 
parts  of  the  United  States. 

268 


FOREIGN  TRADE  AND  INTERNATIONAL  STANDING 

Of  course,  when  they  came  to  the  counter  in  the  de- 
posits of  the  regular  customers  the  drafts  would  go 
through  without  discussion.  With  the  authenticity  of 
the  documents  and  their  ultimate  payment  guaranteed 
by  the  local  depositors  there  were  no  reasonable  grounds 
for  questioning  them.  But  when  presented,  as  they  often 
were,  by  strangers  or  by  individuals  not  possessing  any 
means  or  credit,  the  case  proved  somewhat  different. 
Then  to  cash  the  draft  meant  to  advance  money  solely 
upon  the  credit  of  an  instrument  purporting  to  be  the 
obligation  perhaps  of  a  small  bank  in  Colorado  or  New 
Mexico  about  which  nothing  whatever  was  known.  In 
all  cases  of  that  kind  there  is,  of  course,  the  risk  of  forgery. 
The  draft  may  not  be  the  thing  it  purports  to  be.  As  I 
shall  explain  in  the  subsequent  paragraph,  the  risk  of 
forgery  is  greater  in  handling  drafts  drawn  or  purporting 
to  be  drawn  by  banks  of  the  United  States  type  than  in 
handling  drafts  emanating  from  large  branch  banks. 
Apart  altogether  from  the  consideration  of  a  possible 
forgery  the  situation  is  perplexing  enough.  The  holder 
of  the  draft  offers  to  procure  identification,  so  there  is 
no  trouble  on  that  score.  The  amount  is  $200.  What  is 
to  be  done?  You  say  to  the  payee:  "We  know  nothing 
of  that  bank  in  the  Western  states.  It  may  fail  before 
we  could  get  our  money  back.  So  we  must  ask  you  for 
an  endorser  as  well  as  for  identification."  This  position 
is  perfectly  consistent  with  sound  banking  principles. 
Although  a  bank  might  continue  cashing  such  drafts  un- 
endorsed  without  experiencing  losses  the  risk  is  surely 
there,  and  it  is  altogether  disproportioned  to  the  ben- 
efit secured  by  the  bank  through  cashing  the  drafts. 
It  is  the  duty  of  the  branch  officers  and  employees, 
and  they  are  so  instructed  in  the  code  of  rules,  to 
avoid  subjecting  the  bank  to  any  risk  at  all  in  deal- 
ing with  casual  customers.  Hence  an  endorser  is 
necessary  unless  some  reliance  can  be  placed  upon  the 
payee, 

269 


A    RATIONAL    BANKING    SYSTEM 

BRANCH    BANKS    WOULD     IMPROVE    THE    COUNTRY'S 
STANDING 

The  case  would  be  different  if  there  were  in  the  Repub- 
lic a  comparatively  small  number  of  large  branch  institu- 
tions. Then  the  foreigners  could  without  much  difficulty 
keep  themselves  informed  regarding  the  individual  banks. 
And  it  is  reasonably  certain  that  every  United  States 
branch  bank  that  had  occasion  to  remit  money  frequently 
to  a  foreign  country  would  have  an  arrangement  with 
an  important  bank  in  that  country  the  officers  of  which 
would  feel  honored  by  being  selected  to  act  as  corre- 
spondent. The  branches  of  this  correspondent  bank 
would  be  instructed  to  accord  every  respect  to  the  drafts 
and  orders  that  were  presented  at  their  counters.  In 
this  case,  too,  the  risk  of  forgery  would  be  greatly  reduced, 
for  the  United  States  bank  would  furnish  the  foreign 
bank  with  complete  sets  of  specimen  signatures  of  officers 
authorized  to  sign  on  its  behalf;  and  every  branch  of  the 
drawee  bank  would  thus  have  the  means  of  comparing 
the  signatures  on  the  documents  presented  with  the 
specimens  in  the  signature  box.  Unquestionably  United 
States  banking  would,  under  these  circumstances  and 
under  others  which  would  be  introduced  with  branch 
banking,  rise  appreciably  in  the  estimation  of  foreigners 
near  and  far. 

FLUCTUATIONS  OF  THE  INTEREST  RATE 

I  have  already  pointed  out  that  with  the  business  of 
the  country  in  the  hands  of  large  branch  banks  the  de- 
structiveness  of  panics  would  be  materially  lessened,  and 
that  a  practical  immunity  from  panics  might  perhaps 
be  enjoyed.  Also  it  is  but  reasonable  to  expect  that  the 
operations  of  branch  banks  possessing  rights  of  note 
issue  against  general  assets  would  entirely  do  away  with 
those  extreme  fluctuations  in  the  interest  rates  at  New 

270 


FOREIGN  TRADE  AND  INTERNATIONAL  STANDING 

York.  Eminent  financiers  have  at  different  times  char- 
acterized those  10,  20,  50,  and  100  per-cent.-interest 
rates  as  a  national  disgrace.  It  might  be  said  that  they 
represent  only  one  of  a  number  of  disgraces  for  which 
the  system  of  isolated  small  banks  and  rigid  currency  is 
responsible.  There  is  excellent  ground  for  believing  that 
with  a  system  of  banking  and  currency  such  as  I  have 
outlined,  in  good  working  order,  a  higher  rate  than  7  or 
8  per  cent,  would  never  be  seen  in  the  American  metropo- 
lis. For  during  the  fall  season  the  banking  institutions 
would  not  be  compelled  to  force  a  large  mass  of  credits 
from  one  set  of  borrowers  in  order  to  place  them  at  the 
disposal  of  another.  They  could  provide  the  bulk  of  the 
funds  necessary  for  the  special  work  of  the  crop  moving 
through  calling  into  being  an  extra  amount  of  currency 
which  could  remain  in  existence  only  while  there  was  work 
for  it  to  do.  It  is  well  known  that  the  urgent  bidding 
of  stock  market  borrowers  whose  credits  are  taken  away 
has  much  to  do  in  bringing  about  the  erratic  fluctuations 
in  the  interest  rate. 

How  THE  SKILLED  FINANCIERS  PROFIT 

The  two  things — the  panics  and  the  extreme  fluctua- 
tions in  interest — have  some  considerable  effect  in  caus- 
ing a  certain  class  of  European  investors  to  be  cautious 
in  dealing  with  the  United  States.  Many  of  them  look 
upon  it  as  a  field  to  avoid,  because  of  the  danger  of  being 
caught  in  a  panic  or  semi-panic.  The  financial  instability 
and  the  tendency  of  money  rates  to  rise  on  occasions  to 
very  high  levels  have  their  effect,  of  course,  in  producing 
violent  fluctuations  in  security  prices.  From  the  present 
order  of  things  the  skilled  bankers  at  the  centres  and  the 
foreign  banking  institutions  interesting  themselves  largely 
in  United  States  financial  matters  are  able  to  extract  good 
profits.  They  benefit  through  the  high  rates  of  interest 
prevailing  in  the  fall  of  the  year  and  in  other  seasons 

271 


A    RATIONAL    BANKING    SYSTEM 

during  which  monetary  conditions  are  upset  or  subject 
to  great  strain.  Their  experience  and  position  also  enable 
them  usually  to  extract  profit  from  the  fluctuations  in 
securities.  Mr.  Andrew  Carnegie  is  reported  as  saying 
that  if  he  had  wished  to  make  some  money  he  could  have 
made  $50,000,000  in  the  1907  panic,  as  he  had  the  neces- 
sary cash  and  conditions  were  ripe.  One  may  easily  be- 
lieve that  he  could  have  done  so.  It  strikes  an  outsider 
that  it  is  quite  time  to  consider  the  abolition  of  a  banking 
system  which  creates  conditions  permitting  the  great 
capitalists  to  exploit  the  unlearned  and  ignorant  in  such 
wholesale  fashion.  The  extra  profits  made  by  lenders  of 
money  and  by  wealthy  operators  in  securities  represent, 
of  course,  special  expenses  for  the  borrowing  classes  and 
losses  for  thousands  of  humble  speculators  and  investors. 

FOREIGN  BANKERS  FINANCE  DOMESTIC  BUSINESS 

In  connection  with  this  matter  of  international  stand- 
ing it  should  be  borne  in  mind  that,  under  the  conditions 
presently  prevailing,  foreign  banking  institutions  finance 
a  large  part  of  the  foreign  trade  of  the  United  States. 
They  also  take  a  rather  important  part  in  financing  the 
domestic  business  of  the  country.  Thus,  in  connection 
with  the  cotton  trade,  the  foreign  bankers  not  only  buy 
a  large  proportion  of  the  bills  covering  exports  of  raw 
cotton,  but  I  understand  that  they  advance  funds  ex- 
tensively to  facilitate  the  purchase  of  the  raw  cotton 
from  the  farmers  and  the  movement  from  the  fields  to 
the  seaports.  One  might  expect  that  in  a  country  so 
large  and  wealthy  as  the  United  States  the  native  banks 
would  perform  that  service  without  assistance. 

Also  three  of  the  Canadian  banks  assist  materially  to 
finance  the  business  of  the  Pacific  Coast,  through  the 
operations  of  their  branches  in  San  Francisco,  Seattle, 
and  Spokane.  When  it  is  considered  that  they  have  built 
up  large  discount  and  deposit  businesses  at  these  points, 

272 


FOREIGN  TRADE  AND  INTERNATIONAL  STANDING 

in  competition  with  United  States  banks  possessing  strong 
local  boards  and  affiliations,  and  endowed  with  all  the 
advantage  pertaining  to  home  institutions,  it  seems  fair 
to  conclude  that  their  success  is  chiefly  due  to  the  de- 
ficiencies of  the  system  of  small  local  banks  in  regard  to 
caring  for  their  own  home  industries  and  trades. 

NEW  YORK  AS  BANKER  FOR  OTHER  NATIONS 

On  one  or  two  occasions  in  the  past  decade  New  York 
participated  with  London  and  other  European  centres 
in  bringing  off  some  international  loans.  Thus  a  portion 
of  the  British  Government  loans  during  the  Boer  War  was 
placed  in  New  York.  Japan  borrowed  in  New  York 
during  the  war  with  Russia;  and  both  Russia  and  Ger- 
many have  placed  an  amount  of  bonds  with  American 
bankers.  When  these  transactions  occurred  there  was 
discussed  the  probability  of  New  York  wresting  from  Lon- 
don the  supremacy  in  world-finance  which  the  British 
metropolis  had  held  for  so  long.  It  now  appears  as  if 
New  York's  participation  in  important  international  is- 
sues of  securities  at  that  time  resulted  merely  from  the 
fact  that  money  conditions  in  the  American  metropolis 
happened  then  to  be  such  as  to  permit  that  course  being 
followed.  Since  then  New  York  has  not  rivalled  London 
or  Paris  in  world-finance  of  this  kind.  True,  a  few  South 
American  issues  come  to  New  York,  and  a  large  amount 
of  capital  has  gone  into  Mexico,  but  the  bulk  of  the  re- 
quirements of  the  outside  world  are  filled  in  London  and 
Paris.  There  is  no  doubt  that  British  trade  has  bene- 
fited tremendously  from  the  foreign  lendings  of  British 
capitalists  and  investors.  It  is  commonly  supposed  that 
the  United  States  has  little  capital  to  spare  for  loans  to 
foreign  governments  and  corporations.  But  I  venture  to  x 
assert  that  if  the  country  had  a  modernized  banking  j 
system  that  would  do  away  with  the  unscientific  and^ 
wasteful  use  of  cash  resources,  and  utilize  the  cash  wealth 

273 


A    RATIONAL    BANKING    SYSTEM 

of  the  country  as  it  should  be  utilized,  it  would  be  found 
that  there  was  enough  capital  in  New  York  to  permit 
participation  in  good  foreign  loans  to  a  much  larger  ex- 
tent than  prevails  at  present.  And  that  would  mean, 
as  a  matter  of  course,  that  much  of  the  proceeds  of  these 
loans  would  be  expended  in  the  United  States,  to  the 
great  benefit  of  the  export  trade  and  the  working  classes. 

THE  BANKING  BUSINESS  OF  MEXICO  AND  THE  WEST  INDIES 

As  I  have  mentioned,  it  is  in  the  countries  and  isl- 
ands, near  and  far,  with  which  the  United  States  trades, 
and  with  which  it  has  important  financial  dealings,  that 
United  States  banks  are  noticeably  absent.  There  is  one 
New  York  institution — the  International  Banking  Cor- 
poration— which  has  been  active  in  extending  its  opera- 
tion in  the  Far  East.  Its  Eastern  branches  are,  of  course, 
controlled  from  the  head  office  in  New  York  City.  There 
are  a  few  banking  institutions  in  the  West  Indies  and 
Mexico  which  are  owned  in  the  United  States.  However, 
they  are  not  branches  of  United  States  institutions,  and 
in  most  cases  their  titles  do  not  indicate  clearly  that  they 
are  of  American  origin.  Of  course,  the  reason  for  the  non- 
representation  abroad  is  that  the  branch  idea  is  under  the 
ban  of  the  laws  and  regarded  with  hostility  by  a  large 
part  of  the  people. 

Now  let  us  picture  the  conditions  that  would  likely  pre- 
vail in  this  respect  if  there  were  in  the  American  Union 
one  hundred,  or  two  hundred,  or  more,  powerful  branch 
banks  operating  under  kind  but  firm  laws  and  enjoying 
the  confidence  of  the  people.  To  make  the  picture  more 
perfect  let  us  suppose  that  pressure  of  public  opinion  has 
produced  a  sensible  lowering  of  the  tariff  wall,  and  that 
it  is  possible  for  vessels  carrying  American  goods  to  other 
countries  to  secure  return  cargoes  which  will  be  admitted 
through  the  customs  at  United  States  ports  at  moderate 
rates. 

274 


FOREIGN  TRADE  AND  INTERNATIONAL  STANDING 
BRANCH  BANKS  WOULD  ASSUME  THE  DOMESTIC  BUSINESS 

The  banks  would  then,  first  of  all,  proceed  to  take  upon 
themselves  the  whole  duty  of  financing  the  country's  in- 
ternal trade  and  industry.  They  would  provide  the  cash 
required  for  paying  the  producers  of  cotton,  and  would 
carry  the  staple  through  its  different  stages.  In  the  case 
of  that  destined  for  home  consumption  they  would  see 
it  to  the  mills — in  the  South  or  in  New  England;  they 
would  advance  the  money  necessary  to  enable  the  mills 
to  pay  for  it  and  hold  it;  and  finally  negotiate  the  bills 
drawn  by  the  mills  or  their  selling  agents  upon  purchasers 
of  the  manufactured  cotton  goods.  And,  in  the  case  of 
raw  cotton  destined  for  export,  they  would  see  it  to  the 
seaports  and  buy  the  foreign  bills  drawn  upon  the  Euro- 
pean markets  by  the  exporters.  The  same  with  wheat, 
corn,  lumber,  coal,  tobacco,  fruit,  and  other  products. 
By  means  of  their  branches  the  home  banks  would  facili- 
tate production  and  interchange  at  all  points  where 
production  and  interchange  took  place.  Each  banking  in- 
stitution could  by  itself  finance  its  due  share  of  the  move- 
ment of  the  great  staples  from  producer  to  consumer  in 
the  case  of  those  consumed  at  home,  and  from  producer 
to  foreign  purchaser  in  the  case  of  those  exported.  I 
hazard  the  opinion  that  if  there  were  great  commercial 
branch  banks  that  would  carry  the  accounts  of  small  dealers 
and  buyers,  and  assist  them  to  export  if  necessary,  there 
would  not  be  so  much  danger  of  important  producing  in- 
dustries falling  into  the  hands  of  trusts  and  combinations. 

EXTENDING  INTO  FOREIGN  COUNTRIES 

If  there  were  great  banks,  such  as  the  Bank  of  Massa- 
chusetts, the  Bank  of  Minnesota,  and  the  Bank  of  Georgia, 
hereinbefore  described,  growing  rapidly  each  year  in  num- 
bers of  branches,  in  resources  and  power,  they  would,  as- 
suredly, as  soon  as  they  were  well  established  at  home, 

275 


A    RATIONAL    BANKING    SYSTEM 

extend  their  operations  into  outside  countries.  There  are 
three  important  fields  into  which  they  would  naturally 
extend  at  the  outset — the  West  Indies,  Mexico,  and  South 
America.  The  trade  of  their  country  with  all  of  these  is 
very  large,  and  with  a  lower  United  States  tariff  it  would 
grow  very  rapidly.  There  would  be  many  bills,  drawn  by 
United  States  exporters,  to  negotiate;  and  many  bills 
drawn  abroad  upon  United  States  importers.  The  branch 
banks  would  be  desirous  of  a  large  participation  in  this 
business.  By  establishing  branches  in  the  principal 
trading  points  in  Mexico,  the  West  Indies,  and  South 
America  they  would  doubtless  get  a  good  deal  of  it.  In 
all  probability  they  would  also  develop  into  formidable 
competitors  with  the  English,  German,  and  Canadian 
banks  that  now  transact  so  large  a  share  of  the  general 
international  business  of  those  countries.  And  it  might 
thus  come  about  that  the  United  States  would  draw  a 
regular  tribute  from  the  trade  of  foreign  lands. 

It  should  not  be  supposed  that  in  establishing  these 
outside  agencies  the  banks  would  be  diverting  to  the 
service  of  alien  nations  funds  needed  at  home.  As  con- 
ditions are  now  a  large  aggregate  of  balances  owned  by 
United  States  firms  and  agents  in  these  outside  places  is 
carried  on  deposit  with  foreign  banks.  Much  of  this  total 
would  be  transferred  at  once  on  the  opening  of  branches 
of  American  banks.  The  foreign  branches  would  thus 
have  deposits  as  well  as  advances.  And  it  might  tran- 
spire that  not  a  few  of  the  banks  operating  abroad  would 
do  so  entirely  on  funds  acquired  abroad,  without  using 
a  dollar  of  their  home  resources. 

UNITED  STATES  BANKS  IN  LONDON 

The  more  important  of  the  branch  banks  would,  of 
course,  have  offices  in  London.  They  would  be  found  in 
China  and  Japan,  and  perhaps  in  India.  In  short,  they 
would  do  a  world  business.  Nowadays  when  Americans 

276 


FOREIGN  TRADE  AND  INTERNATIONAL  STANDING 

are  travelling  abroad  they  are  obliged  to  be  on  the  de- 
fensive in  discussions  of  banking  matters.  For  the  fre- 
quent destructive  panics  and  the  periodical  monetary  dis- 
turbances they  must  offer  apologetic  explanations.  Also 
when  they  visit  London  they  may  see  great  banks  belong- 
ing to  the  various  nations  creditably  represented.  They 
may  notice  that  Canada  is  well  represented  by  the  Bank 
of  Montreal,  the  Canadian  Bank  of  Commerce,  the  Bank 
of  British  North  America,  and  the  Royal  Bank  of  Canada. 
But  no  United  States  bank  is  to  be  seen.  If  on  entering 
the  city  they  were  confronted  with  the  names  of  a  num- 
ber of  great  banking  institutions  belonging  to  their  own 
country,  displayed  over  creditable  buildings,  they  might 
perhaps  find  satisfaction  instead  of  humiliation  in  think- 
ing of  the  representation  of  their  banking  power  abroad. 
Their  satisfaction  would  be  heightened  by  the  knowledge 
that  these  banks  of  theirs,  which  carried  their  names  so 
proudly  in  the  world  centres,  were  engaged  in  financing 
an  honorable  share  of  the  world  business  passing  through 
London. 

THE  RIGHTFUL  PLACE  AMONG  THE  NATIONS 

When  branch  banking  had  got  well  under  way  there 
would  be,  it  is  needless  to  say,  some  very  large  institu- 
tions. In  all  probability  the  largest  of  them  would,  in 
point  of  banking  power  or  resources,  excel  most  of  the 
great  banks  of  Europe.  Powerful  banks  such  as  these 
would  desire  to  have  their  business  in  a  world  centre  like 
London  housed  in  buildings  that  were  in  keeping  with 
their  prestige  and  standing  at  home.  At  present,  so  far 
as  banking  representation  is  concerned,  Canada  outclasses 
the  United  States  in  London.  The  Canadian  banks  I 
have  named  have  creditable  buildings  in  the  heart  of  the 
city,  and  it  is  probable  that  two  or  three  of  these  banks 
possess  an  influence  or  importance  in  London  superior 
to  that  of  any  bank  in  the  United  States. 

277 


XVI 

THE  TREASURY'S   BANKING   BUSINESS 

THE  FUNCTIONS  OF  THE  SUB-TREASURIES 

IT  will  be  well,  at  this  point,  to  deal  with  the  relations 
of  the  national  Government  with  the   banks,  and  to 
discuss  the  question  of  the  treasury's  banking  operations. 
I  am  aware  of  three  different  methods  of  conducting  gov- 
ernmental banking  business. 

First,  there  is  the  method  in  vogue  in  the  United  States 
wherein  the  Government,  through  the  several  sub- 
treasuries,  retains  the  custody  of  a  large  part  of  its  own 
cash  and  acts  largely  as  its  own  banker.  It  also  selects 
a  large  number  of  banks  to  act  as  depositories,  but  exacts 
specific  security  for  each  deposit  of  national  funds  which 
it  confides  to  the  banks.  In  the  past  it  has  happened 
frequently  enough  that  heavy  collections  of  revenue  and 
the  sequestration  of  the  funds  in  the  treasury  vaults 
operated  to  distress  commercial  and  other  borrowers  very 
considerably,  through  causing  stringency  in  the  money 
markets.  This  distress  the  treasury  officials  have  en- 
deavored to  alleviate  through  increasing  the  deposits  of 
Government  funds  in  banks.  For  governmental  disburse- 
ments checks  are  drawn  on  the  sub-treasuries,  and  every 
day  the  sub-treasuries  and  banks  exchange  items,  differ- 
ences being  settled  in  specie  or  legals.  As  the  system  is 
familiar  to  banking  and  financial  readers,  it  is  not  neces- 
sary to  describe  the  functions  of  the  sub-treasuries  in 
detail. 

278 


THE    TREASURY'S    BANKING    BUSINESS 


THE  MEDIUM  OF  A  CENTRAL  BANK 

Secondly,  there  is  the  method  in  vogue  among  the  prin- 
cipal European  nations  which  is  briefly  to  commit  the 
governmental  banking  business  to  a  central  bank.  As 
the  several  countries  follow  somewhat  different  methods, 
I  shall  sketch  the  outlines  of  the  scheme  of  the  relations 
between  the  Government  and  the  central  bank  as  exist- 
ing in  England,  France,  and  Germany.  In  England  the 
Bank  of  England  is  banker  for  the  Government.  The 
original  capital  of  the  bank  was  invested  altogether  in 
advances  to  the  British  Government.  In  return  for  this, 
and  for  its  management  of  the  public  debt,  the  bank  was 
given  certain  valuable  privileges,  the  most  important  of 
which  is  the  practical  monopoly  of  note  issue  in  England 
and  Wales.  Mr.  Edward  G.  Lowry,  in  his  Foreign  Banks 
and  Financial  Systems,  gives  the  following  description 
of  the  specific  services  it  performs  in  connection  with  the 
management  of  the  national  debt: 

"(i)  The  entire  conduct  of  all  operations  incidental 
to  any  issue  of  stock;  (2)  the  keeping  of  the  stock-ledgers 
and  transfer-books  relating  to  inscribed  stock;  (3)  the 
issue  of  stock  certificates  to  bearer;  (4)  the  preparation 
and  payment  of  dividends  on  stock,  and  the  payment  of 
stock-certificate  coupons;  (5)  the  issue  and  payment  of 
treasury  bills  and  exchequer  bonds ;  and  (6)  as  depository 
of  the  public  funds  it  keeps  the  banking  accounts  of  the 
various  Government  departments,  receiving  money,  pay- 
ing drafts,  and  holding  securities,  as  in  the  case  of  ordinary 
banking  accounts. 

"  It  facilitates  the  transmission  of  revenue  moneys  from 
the  provinces  and  acts  as  the  medium  for  the  issue  of  gold 
and  silver  coin,  and  for  the  withdrawal  of  light  coin  from 
circulation.  It  also  grants  temporary  advances  to  the 
Government  in  accordance  with  regulations  sanctioned 
by  Parliament." 

279 


A    RATIONAL    BANKING    SYSTEM 
THE  BANK  OF  ENGLAND 

The  stock  of  the  Bank  of  England  is  owned  by  ten 
thousand  shareholders.  The  shares  are  of  the  par  value 
of  £100,  and  a  holding  of  five  shares  is  necessary  to  enable 
a  shareholder  to  vote.  But  he  cannot  have  more  than 
one  vote,  no  matter  how  much  stock  he  acquires.  So 
there  is  no  danger  of  a  restless  and  ambitious  financial 
clique  obtaining  control  of  the  Bank  of  England.  It  is 
said  that  while  its  handling  of  Government  business  con- 
stituted its  most  important  function  in  its  early  days, 
that  duty  is  now  relatively  less  important  than  its  func- 
tions of  banker  to  other  banks  and  custodian  of  the 
national  gold  reserves.  The  British  Government  has  no 
ownership  of  the  bank's  stock,  and  it  does  not  exercise 
any  control  or  supervision  over  its  operations.  Neither 
does  the  Government  force  the  bank  to  divide  its  profit 
with  the  state. 

THE  BANK  OP  FRANCE 

The  Bank  of  France  has  thirty  thousand  shareholders. 
Its  main  function  is  to  act  as  banker  for  the  French  Gov- 
ernment and  for  other  banks,  but  it  also  deals  directly 
with  the  public  at  all  its  branches,  accepting  deposits  and 
discounting  bills  for  every  one  who  has  an  account  with 
it.  Although  the  Government  has  no  ownership  of  the 
bank's  stock,  it  keeps  in  its  hands  the  appointment  of 
the  governor  and  the  two  sub-governors.  Also  the  Gov- 
ernment chooses  the  names  of  the  managers  of  the 
branches  from  lists  submitted  by  the  governor  of  the 
bank.  Mr.  Lowry  thus  describes  its  functions  as  banker 
to  the  Government: 

"The  bank  acts  without  remuneration  as  the  cashier 
of  the  treasury,  whose  accountants  can  all  pay  in  or 
draw  upon  the  account  of  the  treasury  in  all  the  estab- 
lishments of  the  Bank  of  France,  the  latter  making,  with- 


THE   TREASURY'S    BANKING    BUSINESS 

out  charge,  the  necessary  transfers  in  order  to  central- 
ize all  these  operations  for  the  account  of  the  treasury 
in  Paris.  In  1897  the  bank  was  obliged,  in  addition, 
to  assume  all  the  expenses  of  transportation  neces- 
sary to  furnish  the  country  with  the  different  kinds 
of  coin,  to  furnish  the  necessary  service  for  the  issue 
of  treasury  bills,  and  to  pay  the  coupons  of  pub- 
lic securities  at  the  same  time  as  the  Government 
caisses.  All  these  services  are  rendered  by  the  bank 
without  remuneration.  The  French  Treasury  does  not 
have  a  deposit  in  any  other  bank  than  the  Bank  of 
France." 

Although  the  bank  is  not  paid  directly  by  the  Govern- 
ment for  its  services,  it  gives  them,  as  everybody  knows, 
as  the  price  of  the  Government  deposits  and  the  monopoly 
of  note  issue  it  enjoys. 

THE  BANK  OP  GERMANY 

The  Bank  of  Germany  also  is  privately  owned,  the 
shares  being  distributed,  like  those  of  the  Bank  of  Eng- 
land and  the  Bank  of  France,  in  small  lots.  Regarding 
its  control  and  management,  Mr.  Lowry  says:  ''The  Gov- 
ernment owns  no  shares.  The  management  is  so  con- 
stituted that  the  Government  has  actual  and  final  con- 
trol." 

Regarding  the  disposition  of  the  profits,  Mr.  Lowry's 
pamphlet  says:  "The  profits  of  the  shareholders  in  the 
Reichsbank  are  severely  limited.  After  3^  per  cent,  is 
paid  to  them,  the  Government  receives  three-fourths  of 
the  net  earnings.  As  its  share  of  the  profits  of  the  Reichs- 
bank the  German  Government  received  in  1907  some- 
thing over  $8,500,000.  As  the  Reichsbank,  though  pri- 
vately owned,  is  under  the  final  control  of  the  Chancellor 
of  the  Empire,  it  inevitably  enjoys  close  fiscal  relations 
with  the  Government.  It  is  the  sole  depository  of  Im- 
perial Government  moneys,  and  all  Government  ex- 

281 


A    RATIONAL    BANKING    SYSTEM 

penditures  or  interest  on  the  public  debt  are  made 
through  it.  This  service  is  rendered  without  direct 
compensation." 

However,  it  is  the  case  that  the  Reichsbank  has  a  prac- 
tical monopoly  of  note  issue  in  Germany,  and  in  that 
manner  it  is  supposed  to  get  some  recompense  for  its 
services  to  the  state. 

THE  CENTRAL  BANK'S  COMPENSATION 

Reviewing  these  three  systems,  it  is  to  be  noticed  that 
in  all  three  cases  the  Government  has  placed  upon  the 
central  bank  the  duty  of  handling  the  national  finances. 
Not  one  of  the  governments  referred  to  issues  notes  to 
serve  as  currency,  and  therefore  none  of  them  is  obliged 
to  carry  a  specie  reserve  against  note  issues.  I  wish  to 
draw  attention  especially  to  the  tendency  exhibited  by 
these  principal  European  nations  to  exact  the  perform- 
ance of  onerous  or  important  services  from  the  central 
banks,  and  either  to  abstain  from  reimbursing  the  banks 
or  to  compensate  them  through  conferring  upon  them 
some  privilege  or  advantage  not  enjoyed  by  other  banks 
in  the  same  country.  The  banks  are  expected  to  place 
their  resources  freely  at  the  Government  service.  The 
system  is  undoubtedly  beneficial  to  Government  finance. 
It  has  been  of  great  value  in  assisting  those  European 
nations  to  finance  wars  and  large  military  and  naval 
expenditures.  And  there  is  no  doubt  that  the  United 
States  Government,  by  creating  a  central  bank,  might 
facilitate  issues  of  its  bonds,  and  perhaps  it  might,  like 
the  German  Government,  force  a  share  of  the  profits 
made  by  the  central  bank  into  its  own  coffers.  But  it 
appears  to  me  that  there  should  be  other  considerations 
taken  into  the  account.  The  convenience  of  the  Govern- 
ment is  not  the  only  thing  to  be  kept  in  mind.  A  broad 
and  statesmanlike  view  will  take  into  account  the  effect 
of  such  an  arrangement  as  this  European  system  of  state 

282 


THE   TREASURY'S    BANKING    BUSINESS 

banks  upon  the  general  business  of  the  people  constituting 
the  several  nations. 

It  may  be  considered  good  finance  to  force  a  bank  of 
this  kind  to  perform  services  for  the  state  without  re- 
muneration. But  when  the  root  of  the  matter  is  reached 
the  fact  is  that  the  exaction  of  the  unremunerated  service 
constitutes  a  tax  laid  upon  the  borrowers  of  the  bank 
throughout  the  whole  land.  And  when  the  bank  is  com- 
pensated through  giving  it  a  special  privilege,  such  as  a 
monopoly  of  note  issue,  I  consider  that  the  harmful  effect 
is  more  important.  A  monopoly  of  that  kind  cannot  but 
have  a  restrictive  influence  upon  the  usefulness  of  the 
banking  institutions  which  are  outside  the  monopoly. 
I  have  already  indicated  how  such  a  monopoly  conferred 
upon  a  central  bank  in  the  United  States  would  tend  to 
deprive  small  places  of  banking  facilities  which  they 
would  otherwise  have.  It  may  be  that  in  each  of  those 
European  countries  the  central  bank  is  an  absolute  neces- 
sity for  Government  finance;  but  it  is  doubtful  whether 
the  United  States  Government  is  in  the  same  need  of  its 
services.  But  it  is  time  to  consider  the  third  method  of 
governmental  handling  of  its  banking  business. 

THE  CANADIAN  TREASURY'S  SYSTEM 

The  third  method  is  that  whereunder  the  Government 
has  to  deal  with  a  number  of  large  branch  banks,  each 
with  a  system  of  offices  admirably  situated  for  collecting 
the  national  revenues  and  carrying  on  the  banking  busi- 
ness of  the  treasury.  In  this  case  the  banks  are  paid  for 
their  services  according  to  the  value  of  the  work  done  by 
them.  There  is  no  monopoly,  of  note  issue  or  anything 
else,  given  to  a  favored  institution ;  the  banks  are  treated 
as  equals;  when  the  revenue  is  in  process  of  collection  it 
does  not  happen  that  a  large  mass  of  funds  is  transferred 
from  the  commercial  banks  to  a  Government  vault  or  to 
a  central  bank;  the  funds  are  simply  transferred  from  one 
19  283 


A    RATIONAL    BANKING    SYSTEM 

commercial  bank  to  another,  and  no  matter  where  they 
lie  they  are  available  for  use  in  discounting  the  paper  of 
the  general  public.  This  is  the  system  that  has  been 
worked  out  naturally  in  Canada,  and  I  propose  to  sketch 
the  outlines  of  such  a  system  for  the  United  States  (as- 
suming that  branch  banks  will  ultimately  be  adopted) 
that  would  obviate  the  necessity  or  desirability  of  a 
central  bank  and  of  the  sub-treasury  banking  opera- 
tions. 

REVENUE  COLLECTIONS  OCCASION  No  DISTURBANCE 

Perhaps  it  will  be  objected  that  the  Canadian  Govern- 
ment's financial  transactions  are  of  trifling  consequence 
when  compared  with  the  national  finances  of  the  United 
States,  England,  France,  or  Germany;  and  that  a  de- 
scription of  the  smooth  working  of  the  Canadian  system 
would  not  constitute  proof  or  evidence  that  the  same 
system  would  work  satisfactorily  when  applied  to  such  a 
large  aggregate  of  transactions  as  pass  through  the  United 
States  Treasury.  There  may  appear  to  be  force  in  this 
objection  when  it  is  remembered  that  the  gross  revenue 
of  the  Dominion  Treasury  in  the  fiscal  year  ending  March 
31,  1910,  was  but  $100,000,000,  which  is  a  very  small 
sum  compared  with  the  annual  revenue  of  any  one  of  the 
other  three  countries  mentioned.  However,  there  is  no 
reason  to  suppose  that  in  the  future  the  Canadian  system 
will  work  less  smoothly  and  easily  than  it  at  present  works. 
I  have  no  hesitation  in  expressing  the  opinion  that  when 
the  Dominion's  revenue  is  five  or  ten  times  as  large  as  the 
$100,000,000  of  the  fiscal  year  just  closed  the  collection 
and  disbursement  of  the  Government  funds  will  proceed 
nicely  and  easily.  To-day  there  is  no  part  of  the  financial 
machinery  subject  to  noticeable  pressure  or  friction. 
There  is  no  class  of  borrowers  in  Canada  who  concern 
themselves  in  the  slightest  degree  about  the  matter  of 
the  Government's  balances  in  the  banks.  In  fact, 

284 


THE   TREASURY'S   BANKING    BUSINESS 

neither  the  collection  nor  the  disbursement  of  the  revenues 
is  ever  mentioned  in  the  press  as  a  factor  bearing  on  the 
monetary  situation  in  Canada.  A  system  which  does  its 
work  as  applied  to  a  revenue  of  $100,000,000  in  such  a 
manner  that  the  business  interests  take  no  notice  at  all 
of  its  workings  is  surely  efficient;  and  I  leave  it  to  my 
readers  to  decide,  after  I  have  explained  a  few  of  the  de- 
tails, whether  or  not  it  is  susceptible  of  being  applied 
with  good  results  to  the  much  larger  transactions  and 
totals  of  the  United  States. 

THE  GOVERNMENT'S  FISCAL  AGENTS 

I  have  just  remarked  that  in  their  dealings  with  the 
Government  the  banks  are  on  an  equal  footing.  That 
statement  requires  to  be  modified.  For  in  London  the 
Bank  of  Montreal  is  the  fiscal  agent  of  the  Dominion  of 
Canada.  The  bank  handles  the  various  issues  of  Govern- 
ment bonds,  pays  the  interest  on  the  public  debt  held 
abroad,  and  generally  gives  its  services  as  fiscal  agent. 
As  compensation  for  this  work  the  Government  pays  a 
cash  commission — whatever  it  and  the  bank  agree  upon 
as  being  reasonable.  The  Government  does  not  hamper 
and  hinder  the  operations  of  the  other  banks  by  giving 
the  Bank  of  Montreal  special  privileges  or  by  giving  it 
monopolies. 

That  is  the  arrangement  in  London.  In  Canada  also 
the  Bank  of  Montreal  is  the  chief  fiscal  agent  of  the  Gov- 
ernment. The  revenues  find  their  way  to  the  credit  of 
the  Government  accounts  in  that  bank,  and  the  ex- 
penditures are  made  by  means  of  checks  drawn  by  the 
different  Government  departments  upon  the  bank.  But 
all  the  important  banks  assist  in  the  collection  of  the 
revenue;  all  assist  in  its  disbursement;  and  all  are  given 
a  share  of  the  Government's  deposits  as  recompense  for 
their  services. 

The  balances  carried  by  the  Government  are,  however, 

285 


A    RATIONAL    BANKING    SYSTEM 

not  large.  In  the  bank  statement  for  February  28,  1910, 
for  example,  the  total  is  $8,524,657,  and  this  is  divided 
among  twenty-two  banks.  The  balances,  apart  from 
those  carried  in  the  Bank  of  Montreal,  range  from  $9,986 
to  $348,012.  The  Bank  of  Montreal,  which  does  the 
major  part  of  the  work,  has  $7,040,608  of  Government 
funds.  Rarely  does  the  total  of  the  Dominion  Govern- 
ment's deposits  in  Canada  amount  to  so  much  as 
$15,000,000. 

THE  DISBURSEMENTS 

The  expenditures  are  made  by  check  on  the  Bank  of 
Montreal,  Ottawa.  All  chartered  bank  branches  are  re- 
quired by  law  to  pay  checks  of  the  Dominion  Govern- 
ment at  par.  So  the  collection  of  the  revenue  merely 
means  the  transfer,  in  the  books  of  the  commercial  banks, 
of  funds  from  the  accounts  of  individuals  and  companies 
to  that  of  the  Government;  and  the  disbursement  of 
the  Government  moneys  means  the  transfer  of  the  funds 
back  again  from  the  Government  to  the  individuals  and 
companies. 

There  is,  however,  one  class  of  Government  disburse- 
ment which  removes  the  funds  from  the  reach  of  the 
private  borrower.  It  is  composed  of  the  payments  re- 
mitted abroad  for  interest  on  the  Canadian  debt  held  in 
Europe,  and  for  other  obligations. 

The  Canadian  Government  does  not  exact  specific  se- 
curity for  moneys  deposited  by  it  in  banks,  but  it  is  pro- 
tected by  the  clause  in  the  Bank  Act  which  stipulates 
that  the  amounts  due  by  a  failed  bank  to  the  Ottawa 
treasury  shall  rank  immediately  after  its  note  issues  and 
ahead  of  all  other  obligations. 

THE  BANKS  AS  FISCAL  AGENTS 

I  am  convinced  that  if  branch  banks  had  developed  in 
the  United  States  in  the  same  manner  as  in  Canada  the 

286 


THE   TREASURY'S    BANKING    BUSINESS 

relations  of  the  treasury  with  the  banking  institutions 
would  have  shaped  themselves  very  much  the  same  on 
both  sides  of  the  boundary  line.  Then  the  banks  would 
have  had  the  credit  and  the  machinery  for  undertaking 
the  banking  business  of  the  treasury  and,  if  no  central 
bank  existed,  they  would  gradually  have  assumed  the 
treasury's  functions,  because  they  could  perform  them  so 
much  more  satisfactorily.  It  would  be  an  easy  matter 
to  arrange  a  plan  under  which  the  whole  of  the  revenues 
would  be  paid  directly  into  the  banks  by  the  collectors 
and  by  parties  paying  the  taxes.  And  all  Government 
disbursements  might  be  made  by  means  of  checks  on  the 
various  depositories.  The  several  depository  banks  would 
instruct  their  branch  offices  to  accept  and  give  receipts 
for  all  moneys  deposited  for  Government  account,  whether 
pertaining  to  customs,  excise,  post-office,  or  other  revenue. 
In  return  for  their  services  in  receiving  the  revenue,  trans- 
mitting the  funds  to  points  desired  by  the  treasury,  and 
paying  treasury  checks  at  all  branches,  the  banks  would 
be  entitled  to  have  Government  balances  up  to  a  reason- 
able amount  free  of  interest. 

BOND  SECURITY  FOR  TREASURY  BALANCES 

Under  the  present  system  the  depositories  are  required 
to  lodge  Government  bonds  as  security  for  treasury 
balances  held  by  them.  When  the  treasury  deposits 
$100,000  in  a  national  bank,  the  bank  must  deliver  the 
same  amount  in  Government  bonds  as  security  for  the 
deposit.  Thus  there  is  necessitated  the  purchase  of  bonds 
at  least  equal  in  value  to  the  amount  of  the  deposit ;  and 
actually  the  bank  gains  no  new  funds  whatever,  but  it 
makes  a  profit  because  it  pays  no  interest,  or  perhaps 
i  per  cent.,  on  the  treasury  balance  which  it  holds,  while 
the  bonds  yield  2  per  cent,  or  more.  This  statement 
holds  notwithstanding  the  fact  that  it  sometimes  happens 
that  a  bank,  on  receiving  a  new  Government  deposit,  al- 

287 


A    RATIONAL    BANKING    SYSTEM 

ready  has  on  hand  sufficient  bonds  of  the  type  required 
as  security  therefor.  In  all  probability  the  bonds  will 
have  been  purchased  beforehand  with  this  end  in  view. 
Or,  if  they  were  purchased  for  another  purpose  altogether, 
it  may  be  that,  on  their  being  diverted  for  use  as  pledges 
against  Government  deposits,  other  bonds  are  to  be  pur- 
chased to  replace  them.  Of  course,  it  might  happen  that 
a  bank  purchased  a  certain  amount  of  Government  bonds 
solely  for  investment,  without  reference  to  the  possibility 
of  its  taking  out  note  circulation  or  being  allotted  treasury 
moneys  on  deposit.  But  it  is  hardly  likely,  if  there  was 
no  thought  of  the  note  circulation  or  of  treasury  balances, 
that  bonds  bearing  so  low  an  interest  rate  as  United  States 
Government  bonds  would  be  selected  for  investment,  ex- 
cept by  some  ultraconservative  institutions. 

THE  UNITED  STATES  TREASURY  AND  BRANCH  BANKS 

If,  on  the  other  hand,  it  were  possible  or  practicable 
for  the  treasury  to  deposit  its  revenues  and  carry  its  bal- 
ances in  the  banks  without  requiring  them  to  lodge  specific 
security  of  any  kind,  then  it  would  probably  come  about 
that  the  collection  and  disbursement  of  the  -national 
revenue  would  proceed  without  occasioning  much,  if  any, 
notice  from  the  borrowing  classes  or  the  general  public. 
If  the  Government  were  given  a  preference  over  other 
depositors  it  would  be  in  much  the  same  position,  as  re- 
gards security,  as  at  present;  and  the  position  of  the 
ordinary  depositors  would  not  be  sensibly  altered  for  the 
worse,  since  the  exaction  of  the  bond  security  is  a  prefer- 
ence in  effect. 

Here  again  the  branch  banks  would  prove  decidedly 
beneficial.  Suppose  there  were  banks  of  that  character, 
and  the  treasury  had  an  arrangement  with  several  of  the 
more  important  banks  in  each  section  of  the  country  to 
receive  all  revenues  and  disburse  all  payments,  no  bond 
or  specific  security  other  than  the  preferential  standing 

288 


THE   TREASURY'S    BANKING    BUSINESS 

being  required,  the  mercantile  and  market  interests  would 
hardly  be  aware  of  the  treasury  operations  at  all.  Both 
the  collection  of  the  revenue  and  the  disbursements  of 
the  treasury  would  consist  nearly  altogether  of  transfers 
on  the  books  of  the  banks. 

It  would  happen  frequently,  when  an  importer  ne- 
gotiated with  his  bank  for  a  loan  to  pay  customs  duties 
on  a  consignment  from  abroad,  that  the  proceeds  of  the 
loan  would  be  placed  to  the  credit  of  the  Government's 
account,  and  that  no  cash  payment  was  necessary.  And 
when  the  Government  made  a  heavy  payment  to  a  ship- 
building concern,  or  to  another  creditor,  the  transaction 
might  represent  merely  a  transfer  from  the  Government's 
balance  to  that  of  the  ship-builder's.  This  transfer  might 
be  made  in  the  books  of  one  principal  branch,  or  it  might 
be  from  one  branch  to  another  branch  of  the  same  bank. 

COLLECTION  AND  DISBURSEMENT  OF  THE  REVENUE 

These  would  be  special  cases.  In  most  instances  reve- 
nue collections  would  consist  of  transfers  from  the  ac- 
counts of  customers  of  one  bank  to  the  credit  of  the 
Government  in  another;  and  treasury  disbursements 
would  consist  largely  of  transfers  from  the  Government 
account  in  one  bank  to  the  accounts  of  customers  of  other 
banks.  No  matter  where  the  funds  lay  they  would,  un- 
til they  were  sent  out  of  the  country,  be  in  the  keeping 
of  commercial  banks  and  available  for  commercial  bor- 
rowers. 

Suppose  the  Government's  balances  rose  to  $220,000,000, 
as  they  did  during  the  1907  panic,  and  suppose  they  were 
divided  among  fifty  great  institutions.  That  would  give 
an  average  of  $4,400,000  per  bank;  and  probably  in  most 
cases  the  Government  deposits  would  represent  less  than 
5  per  cent,  of  the  bank's  total  deposits.  If  a  bank  with 
$100,000,000  of  deposits  holds  Government  deposits  of 
$4,000,000  or  $5,000,000  a  preference  or  priority  given 

289 


A    RATIONAL    BANKING    SYSTEM 

to  the  treasury  balances  would  not  weaken  the  security 
of  the  ordinary  deposits  to  an  appreciable  extent. 

At  present  the  payment  of  large  sums  into  the  treasury 
often  means  the  taking  away  of  credits  enjoyed  by  mer- 
cantile, manufacturing,  and  producing  interests.  If  there 
were  branch  banks  and  the  practice  changed,  as  I  have 
explained,  the  necessity  for  that  would  pass ;  the  Govern- 
ment's operations  would  be  passed  through  an  immense 
clearing-house  comprising  the  whole  country.  There 
would  be  a  large  number  of  transactions  wherein  scarcely 
any  cash  need  change  hands,  owing  to  entries  offsetting 
each  other. 

In  regard  to  the  ability  of  the  branch  banks  to  relin- 
quish the  Government  balances  when  required,  there  need 
be  little  apprehension.  Each  bank  would  quickly  arrive 
at  a  perfect  understanding  of  the  working  of  the  Govern- 
ment account  carried  by  it.  It  would  know  in  what 
manner  the  funds  might  be  used  so  as  to  yield  some  profit 
and  yet  be  available  when  called  for. 

THE  COMPTROLLER  OF  THE  CURRENCY 

At  this  point  I  may  with  propriety  refer  again  to  the 
change  which  the  institution  of  branch  banks  would 
effect  in  the  relations  of  the  banks  with  the  Comptroller 
of  the  Currency.  The  Comptroller  now  has  seven  thou- 
sand national  banks  to  supervise.  He  must  obtain  state- 
ments from  them;  he  must  use  his  best  endeavors  to  dis- 
cover whether  they  observe  the  laws;  and  he  must  take 
the  responsibility  of  closing  weak  banks  or  of  letting  them 
continue  in  operation.  Also  he  is  conscious  that  the 
banks  under  his  supervision  comprise  less  than  one- 
third  of  the  banking  institutions  of  the  country;  in  other 
words,  the  bulk  of  the  banking  business  of  the  United 
States  lies  outside  his  influence  or  jurisdiction. 

The  collection,  tabulation,  and  arrangement  of  the  de- 
tails submitted  by  seven  thousand  separate  units  involve 

290 


THE   TREASURY'S   BANKING   BUSINESS 

a  huge  amount  of  labor;  and  the  task  grows  ever  more 
formidable  with  the  steady  growth  of  the  number  of 
national  banks.  Then,  it  always  happens  that  there  are 
a  considerable  number  of  delinquents.  Some  banks  offend 
against  a  certain  rule ;  others  offend  against  a  different  rule ; 
and  others  again  go  contrary  to  something  else  that  the  law 
stipulates.  It  would  hardly  be  practicable  to  invoke  the 
legal  penalties  against  all  violators  of  sound  laws  or  sound 
practices.  They  are  too  numerous.  It  would  be  differ- 
ent if  the  Comptroller  might  concentrate  his  attention 
upon  a  few  offenders.  In  this  respect  the  inauguration 
of  branch  banks  would  greatly  simplify  the  relations  of 
the  Comptroller  with  the  banks.  Instead  of  being  able 
to  give  but  a  microscopic  share  of  his  attention  to  the 
affairs  of  each  banking  institution,  he  could,  if  he  had 
only  one-thirtieth  of  the  present  number  to  deal  with, 
devote  a  fair  share  of  attention  to  each  one.  In  all  prob- 
ability the  delinquents  would  be  few  in  number;  and  that 
being  so,  it  would  be  possible  to  deal  with  them  in  a  more 
satisfactory  manner. 

REDUCTION  IN  THE  NUMBER  OP  BANKS 

Suppose  there  were  in  process  a  steady  transformation 
of  single-office  banks  into  branch  banks.  Each  state- 
ment day  would  see  a  decrease  in  the  number  of  banks 
reporting  to  Washington;  but  the  statements  received 
would  cover  an  increasing  proportion  of  the  banking  busi- 
ness of  the  whole  country.  It  might  be  twenty-five  or 
thirty  years  before  the  process  was  in  anywise  complete. 
While  it  was  under  way  American  banking  and  finance 
would  be  growing  more  stable  and  satisfactory.  When 
the  transformation  was  completed  the  responsibility  for 
collecting  statistics  from  the  thousands  of  branch  offices, 
and  for  transmitting  the  consolidated  returns  to  the 
Comptroller,  would  rest  with  the  banking  executives  in 
the  centres  of  the  different  geographical  sections.  These 

291 


A    RATIONAL    BANKING    SYSTEM 

executives  would  have  much  better  means  than  the 
Comptroller  possesses  of  disciplining  delinquent  officers. 
They  could  easily  arrange  matters  so  that  returns  from 
all  offices  were  forthcoming  with  reasonable  promptness 
and  certainty.  So  far  as  observance  of  the  laws  is  con- 
cerned, the  rules  and  regulations  of  each  bank,  governing 
all  its  branches,  would  necessarily  be  based  on  the  law 
of  the  land. 

The  returns  published  by  the  Comptroller  would  derive 
a  new  significance. 

THE  BANKING  POSITION  BY  GEOGRAPHICAL  DIVISIONS 

For  the  general  public  the  five  abstracts  published  each 
year  contain  only  totals  and  generalizations;  they  give 
no  opportunity  of  studying  the  progress  and  position 
of  the  individual  banks.  The  statements,  however,  show 
in  a  measure  the  banking  development  of  the  different 
cities,  states,  and  sections.  But  they  are  imperfect,  even 
for  this  purpose,  since  they  contain  nothing  but  the 
national  bank  figures. 

If  the  country  were  served  by  branch  banks,  with  the 
offices  of  each  large  institution  extending  into  several 
sections  or  divisions,  it  perhaps  would  not  be  feasible  to 
show  the  development  of  the  banking  figures  of  the  re- 
spective geographical  divisions  or  of  the  cities  and  towns. 
The  Governmem:  could,  of  course,  require  each  bank  to 
publish  the  balance  sheet  of  each  branch;  and  in  that 
way  the  loans  and  deposits  in  the  several  districts  could 
be  arrived  at.  But  such  a  requirement  would  be  calcu- 
lated to  annoy  and  distress  the  banks.  It  would  mean 
that  each  institution  would  be  compelled  to  provide,  for 
the  benefit  of  its  competitors,  a  list  of  the  places  where  it 
had  good  and  profitable  business.  It  is  very  likely  that 
the  publication  by  any  bank  of  the  fact  that  it  had  a 
large  line  of  deposits,  or  discounts,  or  both,  at  a  certain 
point,  would  result  in  inducing  several  new  competitors 

292 


THE    TREASURY'S    BANKING    BUSINESS 

to  appear  at  that  point;  and  they  would,  of  course,  take 
active  measures  to  undermine  its  position.  The  risk  of 
attracting  formidable  opposition  through  publication  by 
a  bank  of  the  details  of  its  business  at  particular  points 
would  be  much  greater  than  the  risk  incurred  at  present 
by  a  single-office  bank  in  publishing  its  figures. 

It  is  a  much  more  difficult  and  laborious  matter  to 
organize  a  new  bank  than  it  is  to  merely  establish  a  new 
branch  of  an  existing  bank.  The  process  whereby  a  large 
bank  establishes  an  office  in  a  territory  or  district  where 
another  bank  has  an  extensive  and  profitable  business  is 
simple  and  easy.  An  order  from  the  general  manager  cov- 
ering the  renting  of  premises,  the  sending  of  stationery  and 
other  supplies,  and  the  appointment  of  the  staff  is  all  that 
is  required.  If  the  branch  proved  unprofitable  it  would  be 
withdrawn,  and  the  stockholders  of  the  parent  institution 
would  not  notice  the  loss.  But  if  the  newly  created  single- 
office  bank  should  fail  to  meet  the  expectations  of  its 
founders  it  might  be  necessary  to  close  it,  or  liquidate  it, 
or  sell  it  to  another  concern — in  any  case  the  stockholders 
would  experience  a  disagreeable  loss. 


XVII 

BRANCH   BANKS  AND   BUSINESS  MORALITY 
A  COMPARISON  OP  COMMERCIAL  PAPER 

IN  his  address  to  the  Missouri  Bankers'  Association, 
from  which  I  have  already  quoted,  Dr.  Joseph  French 
Johnson  made  the  following  admission  (see  the  Financier, 
New  York,  May  17,  1909) :  "Now  the  quality  of  bankers' 
credit  in  Canada,  I  am  sorry  to  say,  is  a  little  better  than 
it  is  in  the  United  States.  I  don't  know  about  Missouri, 
but  in  those  parts  of  the  United  States  with  which  I  am 
familiar  I  think  the  quality  of  our  discounts,  on  account 
of  the  system  of  granting  discounts,  is  poorer  than  in 
Canada.  In  Canada  the  business  man  deals  with  one 
bank.  He  gets  a  line  of  credit  at  the  beginning  of  the 
year.  He  is  told  that  he  may  have  $20,000,  $30,000, 
$40,000,  $100,000,  or  whatever  his  needs  happen  to  be, 
depending,  of  course,  upon  the  bank's  opinion  of  his 
credit.  He  knows  what  he  can  rely  upon,  but  he  must 
not  sell  paper  in  the  street,  he  must  not  borrow  from  any- 
body else,  but  lean  absolutely  on  his  bank,  and  they  take 
care  of  him. 

' '  Then  the  law  gives  each  bank  grants  which  make  it 
remarkably  easy  for  the  bank  to  protect  itself.  Section 
88  of  the  Bank  Act  has  all  the  effect  of  a  bill  of  sale.  The 
bank  practically  owns  the  wholesaler's  stock  or  the  manu- 
facturer's stock  if  it  so  chooses.  Whereas  in  the  United 
States  we  have  smaller  banks;  a  great  many  business 
men  borrow  from  different  banks,  sell  their  paper  on  the 
street,  so  that  no  one  banker  is  ever  sure  of  the  quality 
of  the  assets  in  his  portfolio." 

294 


BRANCH   BANKS  AND  BUSINESS  MORALITY 

Before  proceeding  to  carry  out  the  main  purpose  of 
this  chapter  it  will  be  well  to  deal  with  the  remark  in  the 
second  paragraph  referring  to  the  extensive  powers  of 
sale  and  ownership  possessed  by  the  banks  over  the  goods 
of  certain  of  their  debtors.  It  is  indeed  true  that  the 
Parliament  of  Canada  has  granted  large  powers  of  this 
kind  to  the  banking  institutions,  powers  which  have  a 
considerable  effect  in  protecting  them  from  losses  from 
bad  debts. 


FOR  THE  BENEFIT  OF  INDUSTRY  AND  TRADE 

Doubtless  it  will  seem  to  some  readers  as  if  legislation 
of  this  kind  had  been  enacted  solely  in  the  interest  of  the 
banks.  They  probably  will  believe  that  the  banks  in- 
itiated it  in  order  to  save  themselves  from  making  losses. 
That  idea  would  not  be  correct.  The  Parliament  of 
Canada  would  hardly  have  consented  to  confer  large 
powers  of  this  kind  upon  the  banks  merely  to  enable  them 
to  earn  better  net  profits.  One  of  the  main  ends  held  in 
view  by  the  parliamentary  managers  who  were  responsible 
for  these  clauses  was  to  create  a  set  of  conditions  under 
which  the  banks  would  be  impelled  to  place  their  resources 
freely  at  the  disposal  of  agriculture,  commerce,  and  in- 
dustry. They  considered  that  the  best  way  to  do  so  was 
to  provide  laws  which  would  enable  the  banks,  with 
safety  and  comfort,  to  employ  their  resources  in  loans  and 
advances  to  producers,  merchants,  and  manufacturers. 
The  powers  were  granted  quite  as  much  in  the  interest  of 
trade  and  commerce  as  in  the  interest  of  banking.  It 
might  be  said  that  the  whole  policy  of  the  Dominion  in 
regard  to  banking  has  latterly  been  framed  on  broad 
statesmanlike  lines.  Parliament  has  abstained  from  bind- 
ing or  fettering  the  banks  unduly,  and  from  diverting  or 
directing  their  investments  into  particular  securities  or 
loans. 

295 


A    RATIONAL    BANKING    SYSTEM 

INFLUENCE    OF    BANKING    SYSTEMS    UPON    COMMERCIAL 
MORALITY 

But  it  Is  time  to  discuss  the  matter  of  the  influence 
exerted  by  different  systems  of  banking  upon  the  com- 
mercial morality  of  the  people  served  by  them.  Doctor 
Johnson  says  he  thinks  the  discounted  paper  in  Canada 
is  a  little  better  in  quality  than  the  paper  in  the  United 
States,  partly  because  of  the  system  of  granting  discounts 
and  partly  because  of  the  extensive  powers  possessed  by 
the  banks  over  the  goods  of  their  debtors. 

Clearly  there  is  involved  here  the  question  as  to  whether 
commercial  morality  in  Canada  is  higher  or  lower  than  in 
the  United  States.  Are  the  debtors  of  the  banks  north 
of  the  international  boundary  more  honorable,  more 
punctilious  about  meeting  their  engagements  than  are 
bank  debtors  south  of  it? 

To  this  question  I  do  not  propose  to  give  a  definite 
answer.  It  will  be  sufficient  to  show  in  what  manner 
certain  characteristics  of  the  banking  systems  in  vogue 
respectively  in  the  United  States  and  Canada  influence  the 
business  morals  of  the  people. 

EFFECT  OF  A  BAD  EXAMPLE 

In  recounting  the  things  which  bear  upon  the  business 
morality  of  banking  debtors  in  the  United  States  I  would 
assign  a  prominent  place  to  the  frequency  with  which 
the  banking  institutions  have  generally  suspended  cash 
payments.  There  is  a  striking  contrast  in  this  respect 
between  the  records  of  the  two  countries.  It  is  now  over 
seventy  years  since  there  has  been  a  general  suspension  of 
specie  payments  by  the  Canadian  banks.  The  United 
States  record  is  five  times  in  fifty  years.  The  thing  has 
occurred  twice  in  the  past  eighteen  years.  I  have  shown 
that  these  numerous  suspensions  cannot  have  been  due 
to  any  other  cause  than  the  single-office  banking  system. 

296 


BRANCH  BANKS  AND   BUSINESS   MORALITY 

In  these  suspensions,  as  in  such  suspensions  wherever 
they  occur,  the  banks  refused,  or  were  unable,  to  pay  their 
just  debts  in  the  form  prescribed  by  law  and  by  custom  or 
usage.  After  regularly  taking  deposits  of  cash  or  its 
equivalent  from  their  customers  under  a  positive  con- 
tract to  repay  them  in  that  form  on  demand,  they,  on 
several  successive  occasions,  repudiated  that  contract. 
On  the  last  two  occasions  they  offered  to  their  creditors 
depreciated  certified  checks  or  clearing-house  certificates 
instead  of  the  cash  to  which  the  creditors  were  entitled. 

Now  it  must  be  that  even  a  single  instance  of  general 
suspension  of  banking  payments  will  exert  a  profound 
effect  upon  the  morals  of  ths  debtor  classes  of  the  country 
in  which  it  occurs.  The  effect  must  be  vastly  increased 
when  the  instances  of  suspension  are  multiplied.  It  can 
have  none  other  than  a  debasing  influence  upon  the  char- 
acter of  the  people.  If  the  banks,  to  which  everybody 
looks  for  examples  of  probity  and  faithfulness,  repudiate 
whenever  they  find  themselves  in  difficulties,  why  should 
ordinary  debtors  be  expected  to  do  otherwise?  When 
circumstances  make  it  difficult  for  him  to  meet  his  note 
at  the  bank,  the  debtor,  you  may  be  sure,  has  his  creditor's 
numerous  lapses  in  mind;  and  if  he  is  not  strongly  en- 
dowed with  good  principles  he  is  impelled  toward  devious 
ways.  Instead  of  holding  his  mind  firmly  to  the  necessity 
of  meeting  his  bond  in  the  agreed-upon  manner  he  casts 
about  for  means  of  evading  his  responsibility. 

On  the  other  hand,  an  unbroken  and  honorable  record 
for  due  payment  of  its  obligations  materially  strengthens 
the  position  of  a  bank  in  relation  to  its  borrowing  cus- 
tomers. Its  debtors  when  pressed  can  never  throw  in  its 
teeth  the  reproach,  "  You  suspended  payments  to  your  de- 
positors and  the  law  did  nothing  to  you." 

Thus  this  circumstance  imparts  a  certain  superiority  to 
the  discounted  paper.  The  bank  has  a  moral  advantage 
in  enforcing  collections  over  another  bank  which  has 
suspended  several  times  in  the  memory  of  its  customers, 

297 


A    RATIONAL    BANKING    SYSTEM 
BLACKLISTING  THE  CHEATS  AND  SCOUNDRELS 

In  the  chapter  on  defalcations  and  frauds  I  explained 
how  branch  banking  would  have  a  tendency  to  lessen 
them  through  subjecting  all  the  banking  offices  in  every 
part  of  the  land  to  uniform  systems  of  rules  and  regula- 
tions and  to  a  continuous  supervision  and  examination 
more  effective  and  thorough  than  the  present  system.  It 
will,  perhaps,  be  admitted  that  the  instances  of  banking 
fraud  and  defalcation,  which  are  constantly  coming  to 
light,  besides  have  a  tendency  to  lower  the  credit  of  the 
banks  in  the  eyes  of  the  depositors,  tend  to  weaken  the 
moral  fibre  of  debtors  generally.  Suspension  of  cash 
payments  is  one  form  in  which  the  bankers  have  set  a 
bad  example  to  the  rest  of  the  community.  Another 
form  of  bad  example  is  seen  in  the  frequency  with  which 
defalcations  occur. 

Next  to  be  considered  is  the  work  done  by  the  banks 
in  the  two  countries  in  educating  their  customers.  Under 
the  branch  system  a  powerful  machine  works  with  uni- 
form pressure  upon  the  borrowing  community  in  every 
part  of  the  land.  A  faithless  borrower  does  not  escape 
his  creditor  bank  by  moving  to  another  place,  for  the 
chances  are  there  will  be  another  branch  in  his  new 
locality,  and  he  will  not  be  suffered  to  rest  in  peace. 
Direct  pressure  extends  everywhere,  and  he  is  made  to 
feel  that  the  arm  of  the  bank  reaches  into  all  corners  of 
the  land,  and  that  honesty  is  the  best  policy.  Of  course, 
a  cheat  or  a  scoundrel  is  blacklisted  at  all  branches  of  the 
bank  which  he  has  defrauded.  The  bank  not  only  re- 
fuses to  deal  with  him  directly,  but  it  warns  its  customers 
against  him  also  when  it  perceives  evidences  of  his  deal- 
ing with  them.  It  may  happen  that  one  bad  transaction 
will  forever  close  the  doors  of  every  chartered  bank  in  the 
country  against  the  offender.  When  they  have  been  de- 
frauded large  branch  banks  press  the  perpetrator  of  the 
fraud  with  the  whole  machinery  of  the  law  as  a  matter 

298 


BRANCH  BANKS  AND  BUSINESS   MORALITY 

of  policy.  They  do  this  more  regularly  and  more  rigor- 
ously than  small  local  banks.  Although  the  American 
Bankers'  Association  follows  the  practice  of  regularly  pur- 
suing and  prosecuting  burglars,  forgers,  and  swindlers, 
it  does  not  take  such  an  active  part  in  punishing  fraudu- 
lent borrowers. 

THE  ASSET  OF  A  GOOD  CHARACTER 

All  this  has  its  effect  on  business  morality.  But  per- 
haps the  factor  bearing  most  strongly  upon  this  issue  is 
the  machinery  by  which  the  discounting  business  is  car- 
ried on.  Take  a  small  trader  or  storekeeper  in  Canada 
who  borrows  $3,000  or  $4,000  on  his  customers'  trade- 
bills  and  on  endorsed  accommodation  notes.  If  he  is 
careful  of  his  credit  at  the  bank,  and  at  the  same  time 
successful  with  his  business,  his  account  will  furnish  a 
continuous  record  of  a  favorable  nature.  It  is  not  alone 
upon  the  officers  of  the  local  branch  that  the  good 
impression  is  made.  The  executive  officers  are  also  im- 
pressed, and  the  impression  thus  made  constitutes  for 
him  a  valuable  asset.  It  ensures  him  the  consistent  sup- 
port of  one  of  the  strong  financial  organizations  of  the 
country,  and  will  stand  him  in  good  stead  wherever  he 
goes  in  the  Dominion. 

If,  on  the  contrary,  he  indulges  in  sharp  practice,  and 
by  means  of  that  inflicts  a  loss  of  $500  or  $1,000  upon  the 
local  branch,  the  fact  will  be  inscribed  upon  the  records 
at  the  branch  and  at  the  head  office.  Even  if  the  branch 
manager,  because  of  his  shame  and  humiliation  at  being 
outwitted,  feels  disposed  to  pocket  the  loss  and  say  noth- 
ing about  it,  the  head  office  will  probably  insist  upon  a 
rigorous  prosecution  if  the  delinquent  debtor  has  broken 
the  law.  It  does  so  with  the  purpose  of  impressing  upon 
the  people  of  the  community  the  fact  that  the  bank  can- 
not be  defrauded  with  impunity  at  any  of  its  branches. 
Every  such  prosecution,  every  instance  in  which  the  per- 
20  299 


A    RATIONAL    BANKING    SYSTEM 

petrator  of  a  fraud  is  tracked  down  and  punished,  tends 
to  improve  the  business  morality  and  to  improve  the 
quality  of  the  paper  in  the  bill  cases  of  the  banks. 

THE  BORROWER  AND  His  BANK 

Every  liability  account  of  any  consequence  carried  by 
the  Canadian  branch  bank  is  watched  by  the  head  office 
experts  as  well  as  by  the  branch  manager.  Though  the 
branch  managers  are  trained  men,  possessing  a  wider 
knowledge  of  banking  risks  than  the  men  in  charge  of 
many  of  the  smaller  banks  in  the  United  States,  they  are 
inferior  to  the  general  managers  at  the  head  offices  in  the 
matter  of  judging  credits.  At  the  branches  attention  is 
given  largely  to  methods  of  increasing  the  volume  of 
business  and  the  profits,  while  at  the  head  offices  a  great 
deal  more  consideration  is  given  to  the  prevention  of 
losses  and  the  financing  of  borrowers'  accounts  in  such 
manner  as  to  make  them  safe  for  the  bank  and  a  means 
of  ensuring  solid  and  lasting  prosperity  for  the  borrowers. 

RESPONSIBILITY  UNDERTAKEN  BY  BRANCH  BANKS 

I  explained  how  the  banks  conduct  a  careful  examina- 
tion of  the  affairs  of  each  business  man  or  firm  applying 
to  them  for  credits.  The  customer  must  submit  full  and 
satisfactory  statements  of  his  position  and  affairs.  The 
bank  will  seek  to  verify  the  particulars  furnished  by  the 
applicant  through  inquiring  about  his  record  at  the  com- 
mercial agencies  if  it  cannot  satisfy  itself  by  studying  his 
record  at  the  bank.  In  considering  applications  much 
importance  is  placed  upon  character.  It  is  almost  an 
essential  that  a  man  applying  for  a  credit  shall  have  a 
good  character.  There  may  be  cases  where  a  bank  can 
lend  money  to  a  rogue  or  a  scoundrel  without  danger  of 
loss.  It  may,  in  case  of  each  loan,  demand  specific  se- 
curity that  will  protect  it  without  reference  to  the  bor- 

300 


BRANCH  BANKS  AND  BUSINESS  MORALITY 

rower.  But  as  a  rule  these  men  are  avoided  if  possible. 
There  is  a  strong  disposition  to  extend  credits  and  facili- 
ties to  parties  bearing  good  reputations  and  possessed  of 
qualities  likely  to  enable  them  to  succeed  in  business  even 
when  they  have  very  small  capital. 

When  the  credit  is  granted  it  will  be  for  a  certain  sum, 
believed  to  be  sufficient  for  the  borrower's  requirements; 
and  provided  he  continues  worthy  of  his  credit,  the  bank 
undertakes  a  measure  of  responsibility  for  seeing  its  cus- 
tomer through  the  season  or  year. 

How  THE  BANK  WATCHES  ITS  BORROWER 

Undertaking  such  responsibility  the  bank  assumes  the 
right  to  keep  the  closest  watch  upon  the  customer's  doings. 
It  will  observe  his  habits  to  learn  whether  he  attends 
properly  to  his  business  and  whether  he  maintains  so- 
briety. He  is  given  to  understand  that  he  must  not 
borrow  elsewhere,  and  that  the  bank  prefers  to  have  all 
his  receipts  deposited  in  his  account,  and  his  payments  or 
disbursements  made  by  check.  If  this  is  done  the  local 
branch  manager  has  a  comprehensive  view  of  the  cus- 
tomer's business.  He  knows  the  volume  of  sales,  where 
the  payments  are  made,  and  what  they  are  made  for. 

The  credit  authorized  by  head  office  will  be  accom- 
panied by  exact  instructions  as  to  the  security  to  be 
given. 

DISHONESTY  ENDANGERS  THE  CREDIT 

If  there  are  signs  that  one  of  these  customers  is  not 
honest,  or  if  the  record  of  his  dealings  contains  indications 
of  dubious  conduct,  the  bank's  inspector  may  advise  the 
general  manager  to  order  the  account  closed.  The  branch 
manager  may,  likely  enough,  resist  the  order;  and  if  he 
can  satisfy  the  general  manager,  in  his  correspondence  or 
by  means  of  a  visit  to  head  office,  that  the  bank  can  with 
safety  continue  the  loan,  it  may  be  carried.  The  point  is 

301 


A    RATIONAL    BANKING    SYSTEM 

that  on  the  first  appearance  of  dishonesty  or  bad  moral 
conduct  on  the  part  of  the  borrower  the  head  office  will 
begin  to  press  for  the  liquidation  of  the  loan,  while  the 
local  banker  may  be  desirous  of  continuing  it.  It  is  ob- 
vious how  in  this  way  the  branch  system  tends  to  pro- 
mote honesty  and  morality  in  a  more  effective  manner 
than  the  local  system.  It  often  happens  that  the  local 
officers  are  averse  to  taking  harsh  measures  against 
parties  in  their  own  town,  even  when  it  is  clear  that  they 
should  be  proceeded  against  or  punished.  Disinclination 
to  cut  down  the  volume  of  their  business,  and  dislike  of 
taking  action  that  might  stir  up  local  sentiment,  operate 
to  induce  them  to  hold  their  hand.  But  the  expert 
bankers  at  the  head  offices  in  the  large  cities  are  not  de- 
terred by  those  considerations. 

BUSINESS  MEN  UNDER  EXPERT  OBSERVATION 

It  is  the  doubtful  accounts  and  the  accounts  which  may 
become  doubtful  that  occasion  the  bulk  of  the  correspond- 
ence between  the  head  office  and  the  branches.  Letter  after 
letter  is  dispatched  to  the  branch,  asking  explanations, 
taking  exceptions  to  particular  features  of  an  account, 
and  ordering  changes  in  methods  or  securities.  In  short, 
every  precaution  that  suggests  itself  to  a  skilled  pro- 
fessional mind  is  taken  to  prevent  these  customers  from 
inflicting  loss  upon  the  bank. 

Now  these  are  the  people  among  whom  the  immoral 
business  men  are  chiefly  found.  And  thus  it  is  the  case 
that  under  a  good  system  of  branch  banks  the  whole  class 
of  them,  in  every  part  of  the  country,  is  brought  under 
the  special  observation  of  the  best  banking  talent  and  is 
subjected  at  nearly  every  village,  town,  and  city  to  the 
strictest  rules  and  the  most  expert  control.  In  dealing 
with  defalcations  and  frauds  by  bankers  it  was  explained 
that  while  bankers  in  the  United  States  and  in  Canada 
might  be  by  nature  equal  in  point  of  morality,  the  exist- 

302 


BRANCH  BANKS  AND  BUSINESS  MORALITY 

ence  of  the  branch  system  in  the  latter  country  makes  it 
much  harder,  as  a  rule,  for  a  Canadian  banker  intent  upon 
fraud  to  accomplish  his  purpose.  In  the  same  way  the 
efficiency  of  the  branch  bank  machinery,  which  places  the 
borrowings  of  all  classes  of  the  people  under  the  control 
of  experts  and  ensures  that  each  borrower  shall  borrow 
only  at  his  home  bank,  makes  it  more  difficult  for  an  im- 
moral business  man  to  defraud  his  bankers,  and  thus  tends 
to  raise  the  tone  of  business  morality. 

LAXITY  IN  THE  CIVIL  LAWS 

I  concede  here  that  the  nature  of  the  civil  laws  govern- 
ing bank  loans  and  investments  has  an  important  effect 
upon  the  morality  of  business  men.  In  any  country  when 
debtors  become  involved  in  difficult  circumstances  many 
of  them  will  repudiate  their  obligations  if  the  laws  permit 
them  to  do  so.  Any  looseness  in  the  laws  which  makes  it 
difficult  for  banks  or  other  creditors  to  enforce  collection 
of  their  rightful  claims,  and  prevents  them  from  obtain- 
ing satisfactory  title  or  right  to  securities  or  goods  form- 
ing the  basis  of  their  loans,  tends  unmistakably  toward 
a  low  standard  of  business  morality.  Laxity  of  this  kind 
in  the  statutes  also  tends  to  make  it  more  difficult  for 
worthy  borrowers  to  secure  the  credits  they  need,  and 
tends  to  make  interest  rates  generally  higher.  On  the 
other  hand,  wise  legislation  of  the  opposite  character 
enables  banks  and  other  lenders  to  supply  credits  liberally 
to  men  of  good  character  and  ability,  engaged  in  al- 
most any  kind  of  legitimate  business;  it  also  helps  to 
keep  interest  rates  down. 


XVIII 

CONCLUSION 

A  COMPARISON  OF  INTEREST  RATES 

IN  this,  the  concluding  chapter,  before  proceeding  to 
summarize  the  various  points  of  my  argument,  I  shall 
devote  a  few  pages  to  the  matter  of  the  interest  rates  paid 
by  bank  borrowers  in  the  United  States  and  Canada. 
Taking  the  two  countries,  and  considering  how  vastly  the 
former  exceeds  the  latter  in  wealth  and  development, 
one  would  expect  that  the  rates  of  interest  for  commercial 
borrowers  would  be  much  lower  south  of  the  international 
boundary.  Actually  there  is  not  a  great  deal  of  differ- 
ence, and  in  many  respects  the  conditions  in  Canada  are 
better  for  the  borrowers. 

In  the  United  States  there  is  a  market  for  commercial 
paper  at  New  York,  Chicago,  Boston,  and  perhaps  a 
couple  of  other  cities,  in  which  paper  can  sometimes  be 
sold  on  the  basis  of  very  low  rates  of  discount.  The  rates 
quoted  bear  a  more  or  less  close  relation  to  the  rates  pre- 
vailing for  time  money  in  Wall  Street.  When  money  is 
cheap  in  Wall  Street  the  rates  of  interest  on  commercial 
paper  in  these  city  markets  are  less  than  those  paid  by 
the  best  borrowers  in  Canada.  But  it  is  only  the  largest 
and  best-known  concerns  which  can  borrow  at  those  rates 
in  the  United  States.  And  at  times — the  fall  of  1909  and 
that  of  1910  are  two  recent  examples — they  must  pay 
6  per  cent,  and  more,  while  the  best  mercantile  borrowers 
in  Canada  are  paying  5^.  I  understand  that  the  im- 
portant borrowers  in  Buffalo  and  other  cities  of  its  class, 

304 


CONCLUSION 

and  in  the  smaller  cities,  are  accustomed  to  go  to  New 
York  or  Chicago  for  their  accommodation.  They  could 
not  borrow  from  the  banks  in  their  home  cities  for  less 
than  6  per  cent,  or  thereabouts. 

LOANS  BASED  UPON  THE  BORROWER'S  DEPOSIT 

Also,  it  is  well  known  that  in  New  York  and  in  all  cities 
the  banks  very  generally  limit  the  credit  which  they  will 
give  a  customer  to  an  amount  five  times  as  large  as  his 
free  balance  on  deposit.  Putting  it  in  another  way,  they 
insist  that  the  borrower  .shall  leave  one -fifth  of  his 
loan  or  advance  on  deposit  with  the  bank  free  of  in- 
terest. 

This,  of  course,  amounts  to  charging  a  higher  rate  of 
interest  than  that  named  in  the  agreement.  A  customer 
who  required  $8,000  would  be  obliged  to  give  his  note  for 
$10,000  and  leave  $2,000  at  his  credit  in  the  bank.  If  the 
rate  of  discount  was  6  per  cent,  the  actual  cost  would  be 
$600  per  year  for  the  use  of  $8,000,  or  yj  per  cent.  This 
fact  should  always  be  borne  in  mind  whenever  a  com- 
parison of  interest  rates  in  the  United  States  and  Canada 
is  instituted.  The  Canadian  banks  are  not  able  to  en- 
force any  such  terms  upon  their  borrowers.  The  bankers 
would  be  glad  indeed  if  they  could  do  so.  But  the  com- 
petition is  so  keen  in  every  part  of  the  country  that  many 
borrowers  get  advances  in  the  form  of  overdrafts,  and 
when  that  is  the  case  the  borrower  only  pays  for  the  sum 
he  actually  uses.  Thus  it  happens  that  a  nominal  rate 
of  6  per  cent,  charged  by  a  bank  in  an  American  city 
quite  often  means  7  or  yj  because  of  this  stipulation  re- 
garding the  free  balance;  while  a  rate  of  6  per  cent,  in 
Canada  means  in  most  cases  6  and  no  more.  It  is  a  fact 
that  in  almost  every  town  and  city  in  Canada,  and  in 
some  very  small  villages  in  the  East  and  in  the  West, 
the  few  Ai  borrowers  get  their  accommodation  at  6, 
if  not  5$. 

305 


A    RATIONAL    BANKING    SYSTEM 
A  HIGHER  DEPOSIT  RATE  AND  A  LOWER  DISCOUNT  RATE 

And  it  should  be  remembered,  further,  that  at  every 
banking  office  in  the  Dominion  the  banks  stand  ready  to 
accept  savings  and  other  time  deposits  from  every  one 
at  3  per  cent.  In  the  United  States  there  are  plenty  of 
commercial  banks  which  do  not  allow  interest;  and  a 
great  many  which  do  not  allow  more  than  2  per  cent.  I 
consider  it  likely  that  in  the  United  States,  especially  in 
the  East,  the  commercial  banks  pay  a  less  average  rate 
on  their  deposits  than  do  the  banks  in  Canada;  and 
taking  them  throughout  the  whole  country,  outside  the 
principal  reserve  centres,  they  charge  their  regular  bor- 
rowing customers  a  higher  average  actual  rate  for  an  ac- 
commodation which  is  not  so  valuable  as  that  extended 
by  the  Canadian  branch  institutions.  And  where  the 
commercial  banks  pay  a  higher  rate  for  their  deposits 
than  the  Canadian  3  per  cent. — in  some  Western  and 
Southwestern  states  for  example  —  the  discount  rates 
actually  charged  are  much  higher  than  Canadian  borrowers 
in  similar  circumstances  pay. 

A  moment's  thought  discovers  that  this  is  but  a  natu- 
ral consequence  of  the  difference  between  the  banking 
systems.  It  is  one  of  the  places  where  the  more  economi- 
cal working  of  the  branch  system  shows  itself.  Their 
relatively  cheaper  cost  of  operation  and  their  relatively 
higher  state  of  efficiency  permit  the  branch  banks  to 
pay  more  for  deposits,  to  secure  the  depositor  better,  and 
at  the  same  time  to  charge  less  on  discounts,  and  for  the 
lower  rates  to  give  an  accommodation  that  is  worth  more 
to  the  borrower. 

BRANCH  BANKS  THE  RATIONAL  SOLUTION 

There  is  a  disposition  on  the  part  of  some  opponents  of 
the  branch  banks  to  regard  them  as  being  perhaps  well 
suited  to  the  needs  of  a  poor  and  thinly  populated  country 

306 


CONCLUSION 

but  not  at  all  adapted  for  operation  in  a  rich,  populous 
country  like  the  United  States.  This  is  not  an  argument 
that  a  banking  expert  would  use,  for  he  would  understand 
clearly  enough  that  the  experience  of  the  European  na- 
tions furnishes  convincing  evidence  of  the  suitability  of 
the  branch  bank  machinery  for  handling  large  totals  and 
transacting  the  banking  business  of  large  populations. 

For  the  benefit  of  readers  who  are  not  familiar  with 
the  admirable  manner  in  which  the  great  branch  banks 
of  Europe  perform  their  functions,  I  shall  now  give 
some  general  reasons  why  it  appears  that  branch  banks 
would  constitute  a  rational  solution  of  the  banking 
problems. 

I  have  already  tried  to  show,  I  hope  successfully,  that 
there  is  much  misconception  regarding  the  branch  in- 
stitutions in  the  minds  of  the  bankers  and  of  the  public; 
that  the  fears,  commonly  entertained,  that  branch  banks 
would  extend  and  perpetuate  the  Wall  Street  domination 
over  the  rest  of  the  country  are  not  founded  upon  reason ; 
and  that  it  may  be  expected  that  branch  banks  would 
extend  quite  as  effective  a  support  to  local  industries  as 
the  independent  local  banks  now  supply.  It  is  an  easier 
task  to  show,  by  means  of  a  broad  and  general  survey, 
that  branch  banks  would  constitute  the  rational  system 
for  the  United  States,  and  that  they  would  harmonize 
nicely  with  the  business  conditions  prevailing  in  the 
Republic. 

TRANSACTIONS  WITH  THE  POLITICIANS 

I  explained  how  convenient  they  would  be  for  the  trans- 
action of  the  Federal  Government's  financial  business.  In 
the  same  way  the  state  government  accounts  should 
logically  be  carried  by  powerful  institutions  commanding 
the  respect  of  the  whole  country,  able  and  willing  to  make 
large  advances  when  necessary,  and  strong  enough  to 
carry  the  deposit  funds  of  the  states  without  pledging 

307 


A    RATIONAL    BANKING    SYSTEM 

specific  security  therefor.  For  carrying  the  accounts  of 
municipalities  also  the  branch  banks  would  be  very 
suitable.  Some  of  the  most  disagreeable  and  humiliating 
scandals  in  American  banking  history  have  had  their 
origin  in  the  dealings  of  state  and  municipal  politicians 
with  the  local  banks.  These  politicians,  with  their  power 
to  dispose  of  large  sums  of  state  or  city  deposits,  some- 
times acquire  a  strong  hold  over  certain  of  the  local  banks. 
They  will,  perhaps,  after  they  have  been  canvassed  by  the 
officers  of  a  bank  in  their  constituency,  give  it  a  large 
deposit,  perhaps  more  than  it  is  entitled  to.  The  bank 
may  compensate  them  through  lending  them  money  on 
inadequate  security  or  through  paying  straight  bribes  of 
cash,  as  in  the  case  of  the  city  of  Pittsburg.  In  either 
case  the  result  is  demoralizing  and  dangerous  for  the  bank, 
and  unprofitable  for  the  state  or  municipality  concerned. 
I  venture  to  assert  that  small  banks  with  purely  local 
boards  are  apt  to  be  more  susceptible  to  political  pressure 
of  this  kind  than  large  branch  banks  would  be.  A  great 
institution  with  branches  in  every  part  of  the  Union,  and 
priding  itself  upon  its  good  name,  would  not  likely  be 
willing  to  dishonor  itself  for  the  balances  or  deposits  of 
any  particular  state  or  city.  Neither  would  its  officers  be 
disposed  to  risk  their  stockholders'  moneys  in  loans  to 
shady  politicians  for  whom  they  entertained  nothing  but 
contempt.  Even  a  branch  bank,  the  operations  of  which 
were  confined  to  a  particular  state,  might  be  expected  to 
withstand  political  pressure  better  than  a  single-office 
local  bank,  especially  if  its  stockholding  were  scattered 
through  the  state.  It  would  be  ridiculous  to  say  that  all 
local  banks  are  susceptible  to  influence  of  this  kind.  Most 
of  them  would  treat  these  immoral  propositions  with  the 
scorn  they  deserve.  But  in  my  opinion  it  is  fair  to  say 
that  in  every  state  there  will  always  be  some  local  banks 
willing  to  buy  politicians,  or  to  be  bought  by  them. 
Under  the  branch  system  the  chances  of  that  would  be 
lessened. 

308 


CONCLUSION 
THE  MOVEMENT  TOWARD  CONCENTRATION 

Next,  consider  the  great  railroad  and  industrial  cor- 
porations. In  no  other  country  are  they  so  large  as  in 
the  United  States.  Many  of  them  have  branch  establish- 
ments in  every  section  of  the  country,  and  some  have  estab- 
lishments in  a  number  of  foreign  lands.  Surely  it  will  be 
admitted  that  large  branch  banks  would  constitute  the 
natural  and  proper  means  for  transacting  their  business. 
The  wealthy  railroad  and  industrial  interests  could 
scarcely  dominate  or  influence  unduly  the  policy  and 
operations  of  banks  such  as  I  have  described  in  the  pre- 
ceding chapters.  It  has  been  remarked  that  in  the  rail- 
road and  industrial  world  the  tendency  in  recent  years 
has  been  steadily  toward  concentration  of  capital  and 
control.  Notwithstanding  that  Congress  and  many  of  the 
state  legislatures  have  sought  to  prevent  it  by  stringent 
laws,  the  concentration  has  gone  forward  almost  irre- 
sistibly. One  reason  it  has  done  so  is  that  capital  can 
work  to  better  advantage  when  concentrated.  If  bank- 
ing were  allowed  to  develop  naturally  it  would  be  tow- 
ard concentration.  As  a 'matter  of  fact,  the  prohibition 
or  discouragement  of  branches  does  not  prevent  concen- 
tration of  banking  capital.  It  merely  ensures  that  when 
concentration  takes  place  it  shall  be  attended  by  results 
disagreeable  and  inconvenient  for  the  general  public. 

THE  BRANCH  SYSTEM  ACCEPTED  IN  COMMERCE  AND 
INDUSTRY 

I  have  mentioned  the  fact  that  many  of  the  great  in- 
dustrial concerns  have  branches  in  every  part  of  the 
United  States.  Also  the  great  mercantile  or  trading 
corporations  are  establishing  branches  in  all  directions. 
The  agencies  of  the  great  life  and  fire  insurance  companies 
are  in  effect  branches  of  the  parent  organizations.  So  in 
industrial  and  mercantile  life,  and  in  some  divisions  of 

309 


A    RATIONAL    BANKING    SYSTEM 

financial  life,  the  branch  principle  is  accepted.  People 
are  not  disposed  to  argue  that  a  branch  factory,  or  a 
branch  store,  or  an  insurance  agency,  is  detrimental  to 
the  public  interest.  I  do  not  know  of  any  business — 
industrial,  mercantile,  or  financial — in  which  branches 
are  so  advantageous  or  so  useful  as  they  are  in  banking. 
In  banking  the  necessity  for  employing  the  services  of 
branches  in  other  localities  is  constantly  arising;  and  the 
usefulness  of  the  various  units  to  each  other,  to  the 
parent  organization,  and  to  the  localities  they  serve  is 
constantly  in  demonstration.  To  forbid  them  appears 
to  me  somewhat  like  placing  artificial  barriers  or  hin- 
drances in  the  way  of  the  circulation  of  the  blood  of  the 
financial  organism. 

THE  RIGHTS  OF  THE  BORROWING  CLASSES 

In  the  course  of  the  argument  I  have  tried  to  show 
that  the  two  items  which  figure  so  prominently  in  the 
discussion  of  banking  reforms — the  currency  question 
and  the  matter  of  panics — constitute  only  a  part  of  the 
problem.  Any  remedy  which  proposes  merely  to  pro- 
vide a  suitable  currency  and  to  provide  machinery  to 
enable  the  banks  to  go  through  a  panic  without  dishonor- 
ing themselves  and  the  country  is  insufficient. 

In  every  country  it  will  be  found  that  the  borrowing 
classes  are  always  in  the  forefront  in  the  matter  of  build- 
ing and  developing  the  national  wealth  and  resources. 
It  is  the  borrowers  who  courageously  risk  their  own  funds 
and  undertake  heavy  responsibilities  in  order  to  better 
their  circumstances;  and  whenever  they  succeed  in  doing 
so  they  have  at  the  same  time  succeeded  in  building  up 
their  country's  resources.  It  is  the  army  of  borrowers 
who  have  conducted  and  operated  the  industrial  and  mer- 
cantile businesses  that  have  built  up  the  immense  re- 
sources of  the  United  States.  My  contention  is  that  in 
any  discussion  of  the  banking  question  the  claims  of  the 

310 


CONCLUSION 

borrowing  classes  should  get  due  consideration.  The 
present  banking  system  falls  far  short  of  giving  them  what 
they  have  a  right  to  expect ;  but,  as  they  are  not  familiar 
with  the  benefits  enjoyed  by  borrowers  in  other  countries, 
they  do  not  figure  prominently  in  the  present  controversy. 

RECAPITULATION  OP  POINTS 

I  think  I  have  said  enough  to  indicate  that  there  are 
very  important  interests  in  the  United  States  which 
would  benefit  materially  from  the  institution  of  a  system 
of  good  branch  banks  with  powers  of  issue  and  devoting 
themselves  to  commercial  banking.  I  may  now  recapitu- 
late the  points  which  I  have  endeavored  to  bring  out  in 
the  course  of  the  argument.  Putting  it  briefly,  if  the 
single-office  banks  of  the  United  States  were  transformed 
into  branch  banks  one  might  expect  that  there  would 
ensue : 

"  i.  An  improvement  in  the  record  of  defalcations  and 
frauds.  Effective  methods  of  checking  and  preventing 
frauds  would  be  put  in  force  in  all  banking  offices,  and 
would  be  supported  by  an  up-to-date  system  of  internal 
inspection. 

2.  A  large  reduction  in  the  number  of  bank  failures 
and  in  the  average  annual  loss  suffered  by  depositors. 
The  transfer  of  the  banking  business  from  thousands  of 
small  bankers  to  a  few  strong,  well-managed  concerns, 
subject  to  internal  and  external  examination,  would  in- 
crease the  financial  stability. 

3.  A  reduction  in  the  expense  of  conducting  the  bank- 
ing business   combined  with   an  increase  of  efficiency. 
Both  borrowers  and  depositors  would  benefit  from  this, 
as  would  also  thousands  of  persons  who  now  have  no 
transactions  with  the  banks. 

4.  An  improvement  in  the  record  of  panics.     They 
would  not  likely  be  so  destructive,  and  suspensions  of  pay- 
ments would  be  very  unlikely  to  occur.     Cohesion  and 

311 


A    RATIONAL    BANKING    SYSTEM 

co-operation  of  the  banking  units  would  tend  toward  this 
result. 

5.  An  improvement  in  the  conditions  of  the  banking 
service.     Every  bank  clerk  who  possessed  ability  and  good 
moral  character  would  have  the  chance  to  rise  rapidly 
to  high-salaried  and  dignified  posts.     And  the  efficiency 
of  the  officers  and  men  would  be  increased. 

6.  A  notable  extension  of  good  banking  facilities  to 
small  villages  and  country  communities.     Owing  to  the 
small   expense   at   which   branches   can   be   operated   a 
branch  bank  would  find  a  profit  in  a  small  annual  turn- 
over. 

'  7.  An  extension  of  facilities  to  the  residential,  retail, 
and  factory  districts  of  the  cities,  and  into  the  suburbs 
as  well.  The  branch  banks  would  be  found  in  all  city 
districts,  and  would  undertake  business  of  all  kinds  for 
the  citizens. 

8.  A  marked  improvement  in  the  facilities  extended  to 
large  manufacturing  and  mercantile  borrowers.     These 
would  be  able  to  borrow  altogether  from  one  bank,  or  a 
couple  of  banks,  which  had  branches  in  their  immediate 
proximity. 

9.  A  smooth  and  comfortable  handling  of  the  harvest 
.  O  movement.     The  transfer  of  currency  from  the  centres 

/h$  to  the  country  districts  could  be  accomplished  without 
the  forcible  transfer  of  credits  which  now  accompanies 
the  transaction. 

10.  A  satisfactory  and  permanent  solution  of  the  cur- 
,.  rency  question.     The  branch  banks  could  be  made  to 

provide  an  elastic  and  thoroughly  safe  currency.  Their 
note  issues  would  constitute  an  exact  measure  of  the  cur- 
rency requirements  of  the  country  in  all  seasons. 

11.  A  large  economy  in  the  use  of  cash.     With  the  ex- 
tension of  the  bank  branches  into  small   places  would 
come  the  utilization  by  the  banks  of  a  huge  fund  of  cash 
now  carried  in  houses  or  on  the  persons  of  citizens. 

12.  A  lessening  of  the  extent  of  Wall  Street's  domina- 

312 


CONCLUSION 

tion  over  the  other  parts  of  the  country.  In  each  section 
a  counterpoise  to  the  Wall  Street  power  would  exist,  and 
the  banks  of  the  several  sections  would  handle  their  own 
New  York  business. 

13.  A  larger  measure  of  banking  publicity.     The  bank 
statements  would  cover  the  whole  banking  business  of 
the  country,  and  the  position  of  the  individual  units  could 
be  followed  more  satisfactorily  and  more  closely  by  in- 
terested depositors  and  students. 

14.  An  entirely  satisfactory  settlement  of  the  problem 
regarding  cash  reserves.     They  might  then  be  carried  at 
the  centres,  where  they  should  be,  and  yet  remain  in  the 
hands  of  the  banks  owning  them. 

15.  A  passing  of  the  necessity  for  naming  a  legal  mini- 
mum of  cash  reserve.     As  other  and  better  methods  would 
be  available  for  ensuring  that  the  banks  carried  suitable 
reserves,  this  practice,  which  has  the  most  mischievous 
effects,  could  be  discontinued. 

1 6.  A  more  generous  allotment  of  banking  resources 
to  commercial  discounting.     The  diversion  of  resources 
into  bonds  would  not  be  so  extensive  as  at  present. 

17.  A  weakening  of  the  opinion  that  commercial  banks 
should  not  transact  a  savings  bank  business.     With  the 
institution  of  strong  branch  banks  there  would  not  exist 
the  same  necessity  for  separating  these  two  departments 
of  banking. 

1 8.  An  effective  competition  on  the  part  of  the  ordinary 
banks  with  any  system  of  postal  banks  which  the  Govern- 
ment may  institute.    The  credit  of  the  branch  banks  would 
ultimately  be  nearly  equal  to  that  of  the  Government,  and 
the  facilities  supplied  by  them  would  be  superior. 

19.  A  uniform  rate  of  interest  on  deposits,  and  a  re- 
duction of  the  inequalities  of  the  discount  rates.    Savings, 
in  every  small  place,  would  command  a  fair  rate  of  in- 
terest, and  a  scientific  adjustment  of  the  available  cash 
resources  of  the  various  localities  would  occur.     The  sur- 
plus of  the  quiet  Eastern  village  would  be  placed,  in  the 


ft. 


A    RATIONAL    BANKING    SYSTEM 

easiest  and  most  satisfactory  manner,  at  the  disposal  of 
localities  where  borrowers  were  more  in  evidence. 

20.  An  improvement  in  the  international  standing  of 
the  United  States.     Branch  banks  would  raise  American 

>  prestige  abroad,  because  of  their  large  resources  and  high 
standing,  and  because  of  the  improvements  they  effected 
in  banking  conditions  in  the  United  States. 

21.  A  better  and  more  effective  support  by  United 
States  banks  to  United  States  firms  and  corporations 
transacting  business   abroad.     This   department   of  the 
banking  business  would  not  be  left  so  largely  in  the  hands 
of  foreigners. 

22.  An  assumption  by  United  States  banks  of  the  whole 
duty  of  financing  the  domestic  business  of  the  country. 
They  would  not  be  content  to  allow  foreign  institutions 

"to  take  a  large  share  of  the  work  of  financing  the  cotton, 
wheat,  etc.,  to  market. 

23.  An  improvement  in  the  business  morals  of  the  peo- 
ple.    Debtors  would  be  under  firmer  and  more  intelligent 
supervision,  and  banking  credits  would  be  more  closely 
watched. 

24.  A  simplification  of  the  relations  of  the  treasury  with 
the  banks.     The  Comptroller  of  the  Currency  would  have 
two  hundred  or  so  banks  to  deal  with  instead  of  seven 
thousand;   and  the  two  hundred  would  cover  practically 
the  whole  business  of  the  country. 

25.  A  transfer  of  the  control  of  banking  from  the  states 
to  the  Federal  Government.     This  would  make  possible 
uniformity  in  the  banking  laws. 

These  preceding  paragraphs  suggest  the  principal 
points  which  I  claim  for  the  branch  banks.  In  the 
course  of  my  argument  I  have  also  indicated  how  the 
transition  from  the  one  kind  of  banks  to  the  other  might 
be  effected  without  causing  an  undue  amount  of  distress 
or  loss  to  the  owners  of  the  existing  banks.  Also  I  have 
pointed  out  how  in  my  opinion  the  interests  of  the  gen- 
eral body  of  the  stockholders,  of  the  borrowers,  depos- 


CONCLUSION 

itors,  note-holders,  and  of  the  general  public  might  be 
satisfactorily  safeguarded  from  unscrupulous  insiders  or 
managers,  and  how  it  might  be  ensured  that  the  branch 
banks  on  the  whole  would  devote  themselves  honestly  to 
the  proper  performance  of  their  legitimate  functions. 
21 


INDEX 


Absorption  of  small  banks Page  148 

Accounts  of  manufacturers 93 

Aldrich,  Senator,  Chicago  address .  2 

American  Bankers'  Association,  supervision  by    .      .      .      .  222 

Argument,  presentation  of 5 

Asset  currency 169 

Audit  companies 218 

Audit,  external 214 

Author,  qualifications  of 4 

Availability  of  cash  reserves 241 

B 

Bad  debts 227 

Balance  of  power 160 

Bank  building 90 

Bank  credits,  regulation  of 301 

Bank  drafts,  United  States .268 

Bank  of  England 279 

Bank  failures  in  Canada 32 

Bank  failures,  immunity  from 34 

Bank  of  France 280 

Bank  of  Germany 281 

Bank  of  Massachusetts 89 

Bank  of  Minnesota 133 

Bank  of  Minnesota  and  a  panic 137 

Bank  of  Montreal,  secondary  reserves  of 235 

Bank-note  circulation — how  it  benefits  borrowers      .      .      .  147 

Bank  notes,  Canadian 59,  64 

Bank  notes — a  means  of  fighting  panics 59,  64 

Bank  notes,  redemption  of 171 

Bank  notes,  secured 38 

Bank  notes,  security  for 170 

317 


A    RATIONAL    BANKING    SYSTEM 

Bank  notes,  sorting  and  retiring Page  177 

Bank  offices  in  cities 105 

Bank  resources,  classification  of 38,  39,  40 

Bank  of  Western  Carolina 198 

Banks,  Morgan 161 

Banks,  single-office,  cost  of 21 

Banks,  Standard  Oil 161 

Bankers'  Association  as  critic  of  cash  reserves      .      .      .      .  242 

Bankers'  Association,  supervision  by 222 

Bankers'  balances  in  New  York 50,  59 

Bankers,  foreign 272 

Bankers  for  the  Government 285 

Banking  business,  consolidation  of 291 

Banking  business  of  Canadian  Treasury 283 

Banking  business  of  Mexico 274 

Banking  business  of  United  States  Treasury 278 

Banking  business  of  West  Indies 274 

Banking  competition  in  Canada 259 

Banking,  diversified 125 

Banking  in  England 47 

Banking  facilities  in  cities 105,107 

Banking  laws,  uniformity  of '.225 

Banking  monopoly 259 

Banking  offices  and  population 109,110 

Banking  position  of  geographical  divisions 292 

Banking  power  of  geographical  divisions 123 

Banking  reforms,  trend  of i 

Banking  revolution 191 

Banking  system,  acknowledged  defects  of 2 

Banking  system  and  commercial  morality 296 

Banking   system — its   responsibility   for   defalcations    and 

frauds 9 

Banking  system — its  responsibility  for  losses 31 

Baring  crisis 47 

Bill  of  exchange,  domestic 116 

Bond  investments 37 

Bond  security  for  treasury  deposits 287 

Borrowers  and  branch  banks 300 

Borrowers — how  they  benefit  from  bank-note  circulation  147,  185 

Borrowers,  local,  and  head  office 149 

Borrowers,  losses  of 31 

Borrowers,  regulation  and  control  of 299 

Borrowing  classes,  rights  of        .      .      . 310 

Boston,  banking  facilities  of 105 

Branch  bank,  a  hypothetical 8 1 

318 


INDEX 

Branch  bank  defences  against  burglary     ....     Page  19 

Branch  bank  examiners 212 

Branch  bank  idea  and  postal  banks 256 

Branch  bank  inspectors 212 

Branch  bank  issues,  security  for 189 

Branch  banks  and  borrowers 300 

Branch  banks  and  business  morality 294 

Branch  banks  and  chain  banks 194 

Branch  banks  and  Comptroller  of  the  Currency  ....  290 

Branch  banks,  credit  of 258 

Branch  banks,  directorates  of 206 

Branch  banks  and  domestic  business 275 

Branch  banks  and  foreign  business 275 

Branch  banks  and  manufacturers 96 

Branch  banks,  misconceptions  regarding 192 

Branch  banks  in  New  York 167 

Branch  banks  and  panics 47,  55 

Branch  banks,  reserves  of 238 

Branch  banks,  service  in 74 

Branch  banks  and  state  legislatures 154 

Branch  banks,  stockholders  of 202 

Branch  banks,  the  case  for 3 

Branch  banks  and  the  treasury 288 

Branch  banks  and  the  wheat  crop 126 

Branch  banks — why  they  are  not  considered        ....  2 

Branch,  establishment  of 90 

Branch  extension  and  issue  rights 184 

Branch  manager,  checks  upon 14,  207 

Branch  profits 103 

Branch  profits  and  note  issue 184 

Branch  system,  economy  of 22, 121 

Branches,  competition  in  establishing 260 

Branches,  examination  of 221 

Branches  facilitate  issue  and  redemption 1 73 

Branches  of  financial  banks 159 

Branches  in  small  places 99 

British  banks,  stability  of 32 

Burglaries 18 

Burglary,  branch  bank  defences  against 19 

Business  morality 294,  296 

C 

Call  loans  in  New  York 236 

Canada,  immunity  from  panics 43 

319 


A    RATIONAL    BANKING    SYSTEM 

Canadian  bank  deposits,  losses  of    ......     Page  33 

Canadian  bank  failures 32 

Canadian  bank  notes 59,  64 

Canadian  bank  stockholders,  losses  of 33 

Canadian  banks,  evolution  of 154 

Canadian  banks,  foreign  branches  of 265 

Canadian  banks  and  panics 56 

Canadian  banks,  reduction  in  number  of 35 

Canadian  banks,  scope  of 156 

Canadian  banks,  service  in 70 

Canadian  cities,  banking  facilities  in 107 

Canadian  postal  banks,  decline  of 254 

Canadian  Treasury,  banking  business  of 283 

Capital  specified  for  each  branch 193 

Cash  payments,  suspension  of 42,  296 

Cash  reserves 231 

Cash  reserves,  availability  of 241 

Cash  reserves  in  Canada 233 

Cash  reserves,  comparison  of 241 

Cash  reserves  in  New  York 54,165 

Central  bank,  compensation  of 282 

Central  bank  and  Government  business 279 

Central  bank  and  monopoly  of  issue 122, 180 

Central  bank,  objections  to 182 

Central  bank  and  small  banks 181,187 

Chain  banks  and  branch  banks 194 

Chartered  banks  and  postal  banks 252 

Characters  and  ratings 91 

Cheats  and  scoundrels,  blacklisting  of 298 

Checks  upon  branch  manager 14,  207 

Checks  upon  minor  officers  and  clerks 15 

Chicago,  commercial  banking  in 158 

Chronic  malcontents 93 

Civil  laws,  laxity  of          303 

Cities,  banking  facilities  in 105 

Classification  of  bank  resources 38,  39,  40 

Classification  of  loans 229 

Clearing-house  committees 243 

Clerks  and  officers 66 

Cohesion,  attempts  to  introduce 196 

Combination,  promoting 200 

Combination,  a  Southern 198 

Commercial  banking  and  financial  banking 158 

Commercial  banks  with  savings  departments 249 

Commercial  discounting  and  savings  bank  funds        .      .      .  257 

320 


INDEX 

Commercial  loans,  valuation  of Page  220 

Commercial  morality 294,  296 

Commercial  paper 116 

Commercial  paper,  a  comparison  of 294 

Comparison  of  banking  practice 22 

Comparison  of  cash  reserves 241 

Comparison  of  commercial  paper 294 

Comparison  of  cost  of  banking  systems 21 

Comparison  of  interest  rates 304 

Competition  in  establishing  branches 260 

Comptroller  of  the  Currency  and  branch  banks    .      .      .      .  290 

Comptroller,  visitation  of  banks  by 223 

Conditions  of  service 66 

Consolidation  of  banking  business 291 

Conversion  of  New  York  balances 163 

Cost  of  providing  currency 142 

Cost  of  single-office  banks 21 

Country  banks,  service  in 70 

Country  branches  and  a  panic 139 

Credits,  regulation  of 301 

Currency  associations,  national 60 

Currency,  cost  of  providing 142 

Currency  evils,  remedies  for 169 

Currency  question 169 

Currency,  a  redundant 178 

Currency,  a  safe  and  flexible 190 

D 

Defalcations,  comparisons  with  Europe  and  Canada       .      .  7 

Defalcations,  effects  upon  public  confidence 7 

Defalcations  and  frauds 7,  298 

Defalcations  often  ruin  small  banks 20 

Defalcations,  responsibility  of  banking  system  for     ...  9 

Demand  for  examiners 216 

Demand  for  men 76 

Deposit  balance,  loans  based  upon 305 

Deposit  branches 99 

Depositors  in  Canadian  banks,  losses  of 33 

Depositors,  losses  of 30 

Depositors  in  national  banks,  losses  of 24 

Depositors  and  note-issuing  rights 185 

Depositors  in  state  and  private  banks,  losses  of  ....  29 

Deposits,  interest  on 259 

Deposits  and  loans 82,  85 

321 


A    RATIONAL    BANKING    SYSTEM 

Deposits  of  other  banks Pages  50,  59 

Directorates  of  branch  banks 206 

Disbursements,  Government 286 

Distribution  of  stock  ownership 259 

Disturbances  of  the  money  market 166 

Diversified  banking  business 125 

Dividends  and  earnings 209 

Domestic  bill  of  exchange 116 

E 

Earnings  and  dividends 209 

Eastern  branches  and  Western  branches 124 

Economy  of  branch  system 22,121 

Education  of  bankers 73 

Emergency  note  issues 62 

England,  Bank  of 279 

English  banking 47 

English  joint-stock  banks 46 

Establishment  of  a  new  branch 90 

Evils  of  legal  minimum  of  reserve 244 

Examination  of  branches 221 

Examination,  external 12 

Examination,  external  and  internal 212 

Examination,  internal *3,  *5 

Examiners,  branch  bank 212 

Examiners,  demand  for 216 

Exchanges,  regulation  of 181 

External  audit 214 

P 

Failed  Canadian  banks 32 

Failed  national  banks 23 

Failed  state  and  private  banks 27 

Failures,  immunity  from 34 

Fidelity,  guaranty  of 16 

Financial  banking  and  commercial  banking 158 

Financial  banks,  branches  of 159 

Financial  centres,  rival 128 

Financing  the  wheat  crop 126 

Flexible  currency 190 

Foreign  bankers  and  domestic  business 272 

Foreign  bankers  in  New  York 264 

Foreign  banks  in  London 276 

Foreign  branches  of  Canadian  banks 265 

Foreign  trade 262 

322 


INDEX 

Forgan,  J.  B Pages  13,  227,  229 

France,  Bank  of 280 

Frauds  and  defalcations 7, 298 

Frauds  invited  by  loose  banking  practice 1 1 

Functions  of  sub-treasury 278 

Funds,  movement  of 120 

G 

Geographical  divisions,  banking  position  of 292 

Germany,  Bank  of 281 

Government  bankers 285 

Government  bonds  and  national  banks 187 

Government  business  and  a  central  bank 279 

Government  disbursements 286 

Government  notes,  retirement  of 188 

Government  supervision  of  banks 217 

Grain  trade 143 

Guaranty  of  fidelity 16 

H 

Head  office  and  local  borrowers 149 

Hoarding  by  interior  banks 49,51,53 

Holding  companies 197 

Hypothetical  branch  bank 81 


I 

Ill-regulated  offices 12 

Immunity  from  bank  failures 34 

Independence  of  geographical  sections 123 

Insolvent  Canadian  banks 32 

Insolvent  national  banks 23 

Insolvent  savings  banks 250 

Insolvent  state  and  private  banks 27 

Interest  on  deposits 259 

Interest  rates,  comparison  of 304,  306 

Interest  rates,  fluctuations  of 270 

Interior  bankers'  balances 164 

Interior  banks,  cash  withdrawals  of 49 

Interior  banks,  hoarding  by 49,  51,  53 

Interior  banks  and  New  York  business 162 

Internal  examination 13,15 

Internal  and  external  examination 212 

323 


A    RATIONAL    BANKING    SYSTEM 

International  banking — address  by  S.  D.  Scudder     .     Page  262 

International  standing 262 

Investments  in  bonds 37 

Issue  and  redemption  facilitated  by  branches       .      .      .      .  175 

Issue  rights  affect  borrowers  and  depositors 185 

Issue  rights  promote  branch  extension       ......  184 

Issues  of  isolated  banks         176 

J 

Jason ville  and  Thompsontown 87 

Johnson,  Dr.  Joseph  French 74,  235,  294 

Joint  stock  banks,  English 46 

K 

Knickerbocker  Trust  Company 48 

L 

Laws,  banking,  uniformity  of 225 

Lawyer  for  bank  branch 91 

Legal  minimum,  evils  of 244 

Legal  reserve 231 

Legal  reserve  and  real  reserve 234 

Legislatures,  state  and  branch  banks 154 

Leroy-Beaulieu,  M.  Paul 203 

Limitation  of  voting  power 203,  204 

Lincoln  Trust  Company 48 

Loans  based  on  borrower's  deposit  balance 305 

Loans,  classification  of 229 

Loans,  commercial,  valuation  of 220 

Loans  and  deposits 82,  85 

Local  banks  in  England 46 

Local  banks  and  monopolies 111,113 

Local  borrowers  and  head  office 149 

Local  industries 84 

Local  manager,  influence  of 150 

London,  foreign  banks  in 276 

London,  tribute  levied  by 262 

London,  United  States  banks  in 276 

Losses  of  borrowers 31 

Losses  of  depositors 30 

Losses  of  depositors  in  Canadian  banks 33 

Losses  of  depositors  in  national  banks 24 

Losses  of  depositors  in  state  and  private  banks    ....  29 

324 


INDEX 

Losses  of  stockholders  of  Canadian  banks       .      .      .     Page  33 

Losses  of  stockholders  of  national  banks 26,  34 

Lowry,  Edward  G 279 

M 

Malcontents,  chronic 93 

Management,  checks  upon 14,  207 

Manager,  local,  influence  of 150 

Manufacturers'  accounts 93 

Manufacturers  and  branch  banks 96 

McLeod,  H.  C 214 

Men,  demand  for 76 

Mexico,  banking  business  of 274 

Misconceptions  regarding  branch  banks 192 

Money  market  disturbances 166 

Monopolies  and  local  banks 111,113 

Monopoly  of  issue  and  a  central  bank 122,  1 80 

Morgan  banks 161 

Movement  of  funds 120 

Municipal  and  state  politicians 307 

Mutual  savings  banks 251 

N 

National  banks  and  asset  currency 169 

National  banks  and  Government  bonds 187 

National  banks,  insolvent 23 

National  banks,  losses  of  depositors 24 

National  banks,  losses  of  stockholders 26,  34 

National  currency  associations 60 

New  branches,  establishment  of 90 

Newfoundland 112 

New  York  balances,  conversion  of 163 

New  York  balances,  recalling 131 

New  York  as  banker  for  other  nations 273 

New  York,  the  best  reserve  centre 129 

New  York,  branch  banks  in 167 

New  York  branch,  functions  of 133 

New  York  call  loans 236 

New  York,  cash  reserves  in 165 

New  York,  control  by 136 

New  York,  foreign  bankers  in 264 

Note  brokers 94 

Note  circulation,  profit  in 145, 171 

325 


A    RATIONAL    BANKING    SYSTEM 

Note  issue  and  branch  profits Page  184 

Note  issues,  emergency 62 

Note  issues  of  isolated  banks 176 

Note  issues,  security  of 140 

O 

Objections  to  central  bank 182 

Officers  and  clerks 66 

Officers,  prospects  of 77 

One-man  control 10 

P 

Panic  of  1907 48 

Panics 42 

Panics  and  branch  banks 47,  55 

Panics,  causes  of 44 

Panics  in  England 46 

Panics,  immunity  from    .      .      r — T" 43 

Panics,  recent,  effects  of i 

Panics  and  remedial  legislation 58 

Panics  and  single-office  banks 45 

Payments,  suspension  of 42,  296 

Pension  funds 18 

Points,  recapitulation  of 311 

Politicians,  state  and  municipal 307 

Population  and  banking  offices 109,110 

Postal  banks  and  branch  idea 256 

Postal  banks  in  Canada,  decline  of 254 

Postal  banks  and  chartered  banks 252 

Postal  banks  in  United  States 255 

Post-office  banks 252 

Power,  balance  of 160 

Practice,  comparison  of 22 

Practice,  loose,  invites  fraud n 

Private  and  state  bank  depositors,  losses  of 29 

Profits,  branch 103 

Profits  in  note  issue 145,171 

Promoting  combinations 200 

R 

Ratings  and  characters 91 

Real  reserve  and  legal  reserve 234 

Recapitulation  of  points 311 

Redemption  agencies 173 

326 


INDEX 

Redemption  of  bank  notes Page  171 

Redemption  of  bank  notes  in  Canada 172 

Redemption  and  issue  facilitated  by  branches      .      .      .      .  175 

Redundant  currency 178 

Reforms,  banking,  trend  of i 

Regulation  of  the  exchanges 181 

Remedial  legislation  for  panics 58 

Remedies  for  currency  evils 169 

Reserve  against  deposits 135 

Reserve  agents  and  interior  bankers 164 

Reserve  centres 128 

Reserve  law 23 1 

Reserve  requirements 232 

Reserves  of  branch  banks 238 

Reserves  in  New  York 54,  165 

Reserves,  secondary 136,235 

Resources  of  savings  banks 247 

Retirement  of  Government  notes 188 

Revenue  collections 284 

Revolution  in  banking 191 

Rigid  currency,  evils  of 127,131 

Rival  financial  centres  128 


S 

Safeguards 210 

Savings  bank  business 246 

Savings  bank  failures 250 

Savings  bank  funds,  investment  of       .      .      .      .      .      .      .  257 

Savings  bank  resources 247 

Savings  banks,  Eastern  theory  regarding 246 

Savings  banks,  English  theory  regarding 247 

Savings  banks,  mutual  and  stock 251 

Savings  departments  of  commercial  banks 249 

Scudder,  S.  D 262 

Secondary  reserves 136,235 

Security  for  bank  notes 170 

Security  for  branch  bank  issues 189 

Security  prices 271 

Service  in  branch  banks  , 74 

Service  in  Canadian  banks 70 

Service  in  country  banks 70 

Service  in  Wall  Street  banks 68 

Settlements  between  banks 134 

Single-office  banks,  cost  of 21 

327 


A    RATIONAL    BANKING    SYSTEM 

Small  banks,  absorption  of Page  148 

Small  banks  and  central  bank 181 

Small  places,  banks  in 99,  187 

Sorting  and  returning  bank  notes 177 

Southern  combination 198 

Stability  of  British  banks 32 

Standard  Oil  banks 161 

State  legislatures  and  branch  banks 1 54 

State  and  municipal  politicians 307 

State  and  private  bank  depositors,  losses  of 29 

State  and  private  bank  failures 27 

Statements 207 

Stock  ownership,  distribution  of 259 

Stock  savings  banks 251 

Stockholders  of  branch  banks 202 

Stockholders  of  Canadian  banks,  losses  of 33 

Stockholders  of  national  banks,  losses  of 26,  34 

Strings  of  banks 195 

Sub-agency 104 

Sub-treasury,  functions  of 278 

Supervision  by  American  Bankers'  Association    .      .      .      .  222 

Supervision  by  Government 217 

Surplus  deposits 102 

Suspension  of  cash  payments 42,  296 

Swindles 18 

T 

Thompsontown  and  Jasonville 87 

Trade  bills 117 

Treasury  balances,  bond  security  for 287 

Treasury,  banking  business  of 278 

Treasury  and  branch  banks 288 

Trust  Company  of  America 48 

U 

Uniformity  of  banking  laws        . 225 

United  States  banks,  increase  in  number  of 36 

United  States  banks  in  London 276 

V 

Valuation  of  commercial  loans 220 

Visitation  of  banks  by  Comptroller 223 

3*8 


INDEX 

Voting  power,  limitation  of Pages  203,  204 

Vreeland  bill 61 

Vreeland,  Hon.  E.  B 120 

W 

Walker,  Sir  Edmund 199,  233,  262 

Wall  Street  banks,  service  in 68 

Wall  Street  domination 153 

Wall  Street  and  the  national  resources       .      .      .      ...      .  157 

Weak  banks 228 

Weekly  statements 208 

West  Indies,  banking  business  of 274 

Western  branches  and  Eastern  branches 124 

Western  Carolina,  Bank  of 198 

Wheat  crops,  financing  the 126 

Wheat  deliveries 144 

Wisconsin  and  holding  companies 197 


THE     END 


SEP  80  1930 


r.,     250241 


UN' 


UN' 


*    LIBRARY 


VC  23959 


